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California and Massachusetts Set Bold New Plans to Lead in Energy Efficiency

By Eleanor Saunders

California and Massachusetts, widely recognized as national leaders in energy efficiency, are now aiming much higher.  Spurred on by legislative mandates for efficiency gains and bold three-year energy plans, the states and their investor-owned utilities have crafted two of the most aggressive models for capturing the energy-saving potential of buildings, appliances, lighting, heating and cooling systems, and even industrial equipment and processes.

But success will hinge in part on program administrators’ ability to overcome obstacles that have hampered efficiency programs for decades:  ratepayers’ chronically tepid responses to incentives that seek to advance energy savings, and their confusion about which actions make the greatest difference.

Historically, even the best efficiency programs have lowered consumption by only around 0.8 percent, far less than the reductions of two percent or more sought by today’s most ambitious states.[1]  And, as a recent survey indicates, [2] people tend to overestimate the impact of steps that save very little energy – for example, turning off lights – while greatly underestimating the value of the more effective ones – for example, insulating homes or buying more efficient bulbs and appliances.

At a time when electricity rates are high and policies addressing climate change figure prominently in state planning processes, state officials recognize that these problems need to be overcome.  Energy and housing experts agree that efficiency measures offer the least costly route to lowering both utility bills and greenhouse-gas emissions (click here and here for examples), and have the added advantage of contributing to job growth and supporting American businesses.[3]  The Obama administration, recognizing the far-reaching benefits produced by efficiency, has poured nearly $100 billion in Recovery Act funding into such programs. But efficiency researchers and state and local planners stress that money alone will not overcome some of the more formidable hurdles – like consumer inertia – that have limited the reach of otherwise promising programs in the past.

“In order to enable energy efficiency, you need three things: incentives and public funding to act as carrots, codes and standards to act as sticks, and improved research to help in developing programs that will maximize behavioral change in energy users, ” said Harvey Michaels, lecturer and director of efficiency strategy research at the Massachusetts Institute of Technology, at a recent energy forum.

The new energy plans for 2010 through 2012 in California and Massachusetts touch all three bases.  First, both plans stress the importance of consumer outreach and education by targeting different community groups and commercial sectors in order to increase participation in energy-efficiency programs.   In line with this more proactive stance, funding for direct engagement with ratepayers has been increased.  Massachusetts, for example, has allocated $600 million per year, or about four times more than the state’s prior spending in this area.  Generous incentives and low- or no-interest loans are part of the draw for residential customers, while plans specifically tailored to meet the needs of the largest commercial customers will aim to attract this sector, where some of the greatest savings lie.

Emphasis is also being placed on the use of rigorous and transparent outcome and program-evaluation measures in order to develop, for the first time, truly comprehensive data about the effectiveness of different approaches.  Included among these tools are new metrics to evaluate the behavioral components of programs, something that had previously been ignored.

The plans for 2010 through 2012 in both states pay particular attention to the building sector, which will need to meet far tougher codes and standards.  Improving efficiency here is critical because residential and commercial buildings together account for 36 percent  of total U.S. energy consumption, 60 percent30 percent of the nation’s greenhouse-gas emissions. of electricity consumption, and

Importantly, the utilities carrying out these programs will also themselves experience the power of the carrot and the stick:  Those companies that do a good job of meeting their efficiency goals will be rewarded with bonuses, while those that fall seriously short will be penalized with fines.

The States’ Current Energy-Efficiency Goals

California

In 2008 California completed a Long-Term Energy Efficiency Strategic Plan that aims to meet two overarching objectives, said Jeanne Clinton, manager of climate strategies at the California Public Utilities Commission (CPUC):

  • Stimulating enough robust demand for goods and services that lower energy use so that they enter the mainstream marketplace without requiring subsidies or incentives; and
  • Generating enough savings from efficiency to supply 15 percent of the state’s goals for greenhouse-gas reductions that were established by AB32, the Global Warming Solutions Act of 2006.

The initial phase of programs based on the long-term strategy is expected to save 6.9 gigawatt hours (GWh) of electricity, 150 million (MM) therms of gas and more than 3 million tons of greenhouse-gas emissions over three years from 2010-2012.  These savings represent the equivalent of three new power plants, and are expected to create up to eighteen thousand jobs, said Clinton.

Massachusetts

The Massachusetts Department of Public Utilities also recently approved new energy-efficiency plans for electricity and gas consumption, responding to mandates in the Green Communities Act of 2008.  The electricity plan alone is expected to reduce consumption by as much as 2.4 percent annually, resulting in cumulative savings of 30 percent of demand by 2020.  Combined efficiency increases for electricity and gas are forecast to produce $6 billion worth of benefits from a $2.1 billion investment, and provide lifetime savings of 30 GWh of electricity and 890 MM therms of gas, according to Frank Gorke, director of the Division of Energy Efficiency in the Massachusetts Department of Energy Resources (DOER).   Gorke also said that the state would invest three times more per-capita funding for efficiency than California.

How CA and MA Plan to Reach their Goals

Both states’ goals are ambitious and specifically designed to confront  obstacles such as poor outreach, narrow focus, and ratepayer inertia and misinformation that  have limited the success of earlier programs.

New approaches to be piloted and evaluated during the current phase of California’s plan include:

  • Outreach tailored to specific ratepayer groups such as renters or non-English language communities; and

California’s plan also calls on utilties to develop uniform statewide programs to address broad customer segments — residential, commercial, industrial and agricultural — and to target upgrades in energy-intensive technologies like lighting and heating, ventilating and air conditioning (HVAC) systems that cut across all sectors.  In line with the belief that behavior change is one of the important keys to success, the CPUC has for the first time established formal metrics that credit utilities for energy savings attributable to behavior-based programs as a way of increasing companies’ commitment  to education and outreach in all customer groups.

But these goals could not be achieved in the absence of state policies that motivate investor-owned utilities to harvest as much energy efficiency as possible.  The CPUC had already taken the important step of decoupling utilities’ profits from their energy sales in 1982, instead basing electricity rates on the fixed and variable costs that companies need to recover plus a reasonble profit.  The state also just funded an incentive program that rewards companies with additional, and increasingly large, bonuses for achieving 80 to 100 percent of their efficiency goals, but assesses them with financial penalties for making only 65 percent or less of promised savings.  Now not only is their financial health independent of the amount of power they sell, it can actually improve if their programs succeed in reducing demand.

The Massachusetts DOER’s approach resembles California’s in many ways, stressing customer outreach along with rigorous evaluation, measurement and validation of programs in its new initiatives.  It also has adopted the same two policies that allow utilities to participate without risk to their bottom lines — decoupling and performance-based incentives.

Examples of some Massachusetts projects that target “hard-to-reach” customers were outlined recently[5]  by Penni McLean-Conner, vice president of customer care at NSTAR, a major utility in the state.  According to NSTAR’s in-house data, the lowest participation rates in prior programs occurred among customers who consumed less electricity, even if their use of it was not particularly efficient, said Conner.  Based on this information, NSTAR developed several special initiatives, including a “Main Streets Program” that targets small community-based businesses and a range of residential programs for both single-family houses and apartment buildings, with different funding sources available for residents at different income levels .  Outreach efforts will include direct promotion to local businesses by specially trained vendors working with NSTAR and community-based programs for residential energy efficiency that are carried out in conjunction with municipalities, said Conner.

A good example is provided by NSTAR’s  new three-year partnership with Renew Boston, a city-run program funded by federal Energy Efficiency Conservation Block Grants through ARRA and by utility companies. The project, which focuses on residential customers, will sponsor over $11.9 million in energy-efficiency work that should save Boston residents $3.4 million annually and create 58 local jobs, according to an August 26 press release  from  Mayor Thomas Menino’s office.  In order to qualify, residents must have incomes that fall between 60 and 120 percent of the state’s median income level and live in buildings with four or fewer apartments.  Participants receive an incentive of 75 percent of costs, up to $2,000, for efficiency measures like installing better insulation.  NSTAR also offers to link participants with local banks for zero percent loans to cover their additional expenses, an option available at least through 2011 and made possible by the utility’s use of public-benefits funds to buy down interest payments.  The utility is in talks with Massachusetts banks and credit unions to extend the loan program and expand the number of people who can enroll in it, said Conner.[6]

The aim behind programs such as this one, said Conner, is to offer comprehensive solutions, so that customers get as much energy efficiency installed as possible when they are in contact with NSTAR.  This approach contrasts to earlier, narrowly focused programs that promoted taking just one step, for example, replacing incandescent bulbs with compact fluorescent ones.  Now, all residential customers will be able to receive free comprehensive energy audits by certified professionals, who, for no extra cost, will caulk any air leaks that are found.  But the ultimate goal of these audits is to encourage deeper retrofits ithrough which inefficient appliances and heating systems are replaced and proper insulation is installed.

Besides the efforts to draw in ratepayers who took less advantage of earlier programs, NSTAR is concentrating on the commercial sector, where the utility’s data show 70 percent of potential savings lie, Conner said.[7]  NSTAR  has created specially tailored programs together  with its biggest end users, like Staples and Massachusetts General Hospital.  In May 2010, the utility signed the largest agreement of this kind with the Massachusetts Institute of Technology, aiming at cutting the institution’s energy use by 15 percent over a period of three years.  The resulting savings are expected to reach about 34 million kilowatt hours, or enough energy to  power more than 4,500 Massachusetts homes for a year.

Both the CPUC and the DOER are also trying to make it easier for consumers to find information about energy-efficiency incentives and programs.  Previously, individual utilities’ programs were marketed separately.  The result for consumers was a confusing and hard-to-access array of options.  Now, the agencies are instituting consistent statewide energy-efficiency branding and integrating all programs under one roof in the hope that greater clarity will lead to increased consumer participation.  In this cyber age, when the “roof” is provided by the Internet, that translates into comprehensive Web sites that will inform residents about the benefits of energy efficiency and allow them to enroll in any instate programs with a click of the mouse.   Click herehere to see the Mass Save portal and here to see California’s Flex Your Power site.

Building Energy Use: How to Move Toward Zero

Along with improved incentives and ways of reaching end users, both states are investing considerable attention and funding in the building sector.

California’s long-term strategic plan contains a number of specific targets, including reducing home-energy demand by 40 percent by 2020, requiring all new construction to meet zero-net energy (ZNE) criteria  by 2030 and retrofitting half of existing commercial buildings to meet the ZNE benchmark by 2030 through revised building codes and efficiency standards.  ZNE buildings are 60 to 70 percent more energy efficient than typical structures, and generate sufficient energy from onsite renewable resources to support all their own needs, sometimes even returning energy to the grid.  In order to achieve many of these goals, California will dedicate $802 million from a combination of funding sources — state, federal and utility – for its Statewide Program for Residential Energy Efficiency (SPREE), which emphasizes a “whole-house” approach.[8]

A boost to California’s building-sector program came from the 2009 passage of AB 758, a bill that mandates the establishment of the first comprehensive statewide energy-efficiency retrofit program for existing buildings.  According to Assemblymember Nancy Skinner (Berkeley), one of the bill’s authors, the efficiency measures called for under the law are expected to save $5 billion in energy costs and 6,000 megawatts of energy,  equivalent to avoiding 12 new natural-gas power plants.  The program also should enable the state to meet or exceed its 2020 targets for energy and water use efficiency in the building sector, as defined in the scoping plan for AB32, the Global Warming Solutions Act of 2006, supporters say.

Massachusetts, too, is working toward zero —  by adopting a new state building code that exceeds prior efficiency requirements by ten percent, and by impaneling a task force on zero-net energy buildings to provide recommendations and ongoing consultation that move the Commonwealth’s building stock toward a ZNE future.  As a first step in that direction, the new building standards will be supplemented by an alternative “stretch code” that requires an additional 20 percent of efficiency.  Individual municipalities may choose to mandate the use of the “stretch code” for new construction and major renovations, especially if they wish to qualify for the DOER’s “Green Communities ” designation, which makes them eligible for renewable-power and energy-efficiency grants.

Federal Support of State Efforts

Federal policy can play a critical role in strengthening and extending efforts like those in California and Massachusetts to other states.  Although states have some of their own funding resources – for example, from the public benefits charges added to utility bills or, in the case of Massachusetts, from the revenues provided by the Regional Greenhouse-Gas Initiative’s (RGGI) auctions of carbon allowances to power plants [9]— financial support available on the federal level adds greatly to what states are able to afford.   Grants from the Department of Energy through the 2009 Recovery Act have already supported hundreds of state-based energy-efficiency projects like Renew Boston and have funded research projects to develop the efficiency technologies of the future.

Two federal bills, H.R.5019 and S.3177, would establish national residential efficiency standards and provide incentives for retrofit projects that meet them.  The Home Star Energy Retrofit Act of 2010, which  was passed by the House of Representatives last May, calls for two levels of certification and would require the Department of Energy to provide specified rebates for work that meets these criteria.

However, at the same time, a type of efficiency funding that has been very popular with states is being threatened by new lending guidelines  from the Federal Housing Finance Agency (FHFA).  Property Assessed Clean Energy (PACE) financing allows municipalities to issue bonds or use other sources of capital to fund home energy-efficiency upgrades and small renewable energy systems.  The loans are repaid by the homeowner through a special assessment on a property tax bill backed by a lien on the property, so that if a homeowner moves, the payments — and the improvements — transfer to the new owner. Although 22 states have passed PACE laws and the Obama Administration has supported the practice with hundreds of millions in stimulus funding, on July 6, FHFA called for a halt to most PACE programs, saying that they present “significant risk” to lenders. That followed warnings from Fannie Mae and Freddie Mac in early May, who suggested in letters to mortgage lenders that energy liens could not take precedence over any mortgages issued through them. The concern is that in the case of foreclosure, taxpayers would end up footing the bill because property taxes are usually paid off first. In response, California’s attorney general hasfiled suit, and other states and municipalities have vowed to join the court action.

But the latest sallies on the federal level are not encouraging.  At the end of August, Fannie and Freddie advised lenders that homeowners with sufficient equity must pay off PACE loans before refinancing their mortgages, and negotiations among the Obama administration, legislators and FHFA have reportedly failed to reach a compromise that would allow PACE programs to continue.


[1] M.Kushler, D. York, & P. Witte (March 2009).  Meeting Aggressive New State Goals for Utility-Sector Energy Efficiency.  ACEEE Report Number U091.

[2] S.Z. Attari, M.L. DeKay, C.I. Davidson et al (August 2010). Public Perceptions of Energy Consumption and Savings. PNAS Early Edition.

[3] See also Senate Could Double Job Creation in Two Bills by Improving Energy Efficiency Requirements (SolveClimate, 6/21).

[4] See, for example, this news story about OPOWER, an energy-efficiency software company with pilots in CA and MA. Over a large population, an approach like this could reduce U.S. greenhouse gas emissions by a surprising 12.7 million metric tons a year (or nearly one percent of total emissions) at the minimal cost of about 2.5 cents per kilowatt hour saved, according to a recent study.

[5] Personal communication, September 8, 2010.

[6] Personal communication, as above.

[7] Personal communication, as above.

[8] See CPUC Decision Approving 2010 TO 2012 Energy Efficiency Portfolios and Budgets on funding, pp. 104-107.

[9] California, as part of the Western Climate Initiative, plans to begin its own carbon allowance auctions in 2012.

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See also on Green Matters:

https://greenmatters.csgeast.org/in_the_spotlight/2009/10/22/report-calls-for-a-nationwide-home-energy-retrofit-market.html

https://greenmatters.csgeast.org/in_the_spotlight/2009/8/6/vast-us-energy-efficiency-gains-possible-says-new-report.html

https://greenmatters.csgeast.org/in_the_spotlight/2009/3/27/maine-launches-program-to-accelerate-home-energy-efficiency.html

https://greenmatters.csgeast.org/in_the_spotlight/2008/10/14/massachusetts-opens-the-clean-energy-floodgates.html

On PACE funding see:

http://www.stateenergyreport.com/the-retrofit-ramp-up-initiative/

http://www.stateenergyreport.com/cities-bring-home-the-promise-of-energy-savings/

https://greenmatters.csgeast.org/delivering-the-promise-of-ener/

On state energy efficiency programs see:

http://www.epa.gov/statelocalclimate/state/index.html

http://www.raponline.org/docs/RAP_REEEP_CompendiumofBestPractices_2010_05_28.pdf

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