The efficiency of energy efficiency programs

Everyone knows a penny saved is a penny earned. The environmental adaptation: A penny not spent on power is a penny earned and a carbon unit saved. More utilities (and their government regulators) are using that mantra to encourage investments in energy efficiency so that households and businesses will be convinced to sip rather than guzzle power to save money on monthly bills and lessen their carbon footprint.

A recent report on Minnesota’s utility-based Conservation Improvement Program shows that much more is being spent on energy efficiency projects. The amount of electricity saved by CIP more than doubled to 900,000 megawatt hours (MWh) between 2006 and 2010. But efficiency expenditures—paid for by all ratepayers—went up in roughly equal proportion (see Chart 1), which suggests that there have not been any returns to scale in terms of efficiency gains. In fact, on a per MWh basis, electricity savings have come at slightly higher cost in 2010 ($207) compared with 2006 ($200). (Carbon emission reductions mirror energy savings over time because they are estimated by formula. One MWh of electricity savings equals 0.9 tons of CO2 savings on average.)

The increase in CIP costs stems from a change in state policy, which shifted from an expenditure requirement to an energy-savings requirement that is equivalent to 1.5 percent of a utility’s annual retail sales, according to the Minnesota Department of Commerce, in response to questions from the fedgazette. This change also offers one explanation why efficiency programs, in aggregate, have not become more cost effective over time in a nominal sense.

To meet higher levels of energy savings, the agency pointed out, utilities have had to create new programs and eliminate others that were not cost effective. They’ve also had to increase some incentives and invest in outreach activities and program measurement, all of which costs money. New efficiency programs are typically less cost effective than legacy programs (like residential lighting), but the agency expects these to become more cost effective over time.

Also notable, individual utilities vary widely on the average cost of their efficiency investments in a given year (see Chart 2). Size has little to with the variation, with the exception that small utilities had both the highest and lowest average CIP costs on a per MWh basis.

The Commerce Department said there were several likely reasons for the disparity. For example, utilities have different customer and consumption bases (what the industry calls “load profile”). Efficiency projects at commercial and industrial users—who typically consume much more energy—are usually more cost effective than residential projects (whose users are small and dispersed). “So utilities with high residential loads may have to spend more to achieve the same savings,” the agency said.

Utilities also charge different power rates, and those with low electricity costs might have to offer higher incentives to convince users to pursue efficiency projects. Utilities can similarly vary in their experience and ability to promote and execute efficiency programs. Those with a “high level of engagement with its CIP programs” are typically more cost effective, according to Commerce.

But back to those pennies: While costs for energy efficiency projects are borne on an annual basis, energy savings accrue over a number of years. Agency guidelines suggest a weighted average payback period of 15 years or less for individual efficiency projects to be worthwhile. With average electricity costs at roughly $85 per MWh, none of the 2010 projects (in aggregate, at the utility level) faces more than a 10-year payback, and most have payback schedules of about one to five years.