forrest through the trees

This is my first post summarizing a late 2009 paper put out by the National Renewable Energy Lab titled “Energy Efficiency Policy in the United States: Overview of Trends at Different Levels of Government” that details various federal, state, and local policies for promoting energy efficiency across a variety of sectors. Part two on transportation and industry is here. Part three on power is here.

Setting the table, a review of EE’s many benefits:

• lower energy bills
• reduced pollution
• reduced GHG emissions
• increased energy security
• deferred infrastructure investments for utilities

There are many opportunities out there for increasing EE and garnering these benefits, but there seem to be just as many barriers to adoption. “Government policies should be designed to target these barriers and enable the benefits of EE to be realized” (v).

1. Strengths and weaknesses at each jurisdictional level

Federal

 + Scale - it can offer effective incentives early in the commercialization process, across a national market, that can be leveraged for maximum impact.

+ Uniform standards - for appliances and vehicles, these minimize the regulatory burden of different state mandates while maximizing the potential impact on national energy consumption.

+ Specialized technical assistance - it has the resources to create entities offering guidance and expertise as states, municipalities, and private industry look to identify and implement EE improvements.

- Over-regulation - overzealous federal involvement threatens to constrict market growth and handcuff state/local officials as they address their own specific circumstances.

State

+ Relative scale - they can customize mandates and incentives to specific conditions while still producing relatively broad impact.

+ Incentives + Economic self-interest - they can offer incentives to attract and foster emerging markets (like Colorado’s green economy).

+ Jurisdiction over utilities - this enables demand-side management in an effort to constrain increasing consumption. The use of public benefit funds or system benefits charges can stabilize funding for EE programs apart from fluctuating state budgets, in turn ensuring a safer environment for private investment and growth.

- Funding/Geographical limitations

Local/Municipal

+ Details - they are aware of specific local conditions and can tailor policies accordingly. They can also use this knowledge to implement state and federal policies most effectively.

- Funding/Geographical Limitations

The key policy drivers behind EE — economic development, energy security, environmental conservation — are present at each level but manifest themselves in different ways. There is also “an inherent tensions between leveraging investment and tailoring policy”:

“Understanding how the policies interact and can contribute to a comprehensive efficiency policy is critical to developing a plan to reduce energy consumption” (2).

2. Buildings

Buildings account for 40% of primary energy, 72% of electricity consumption, and 36% of natural gas consumption. They are also the primary driver of power plant construction: 87% of the growth in electricity sales between 1985 and 2006 is attributable to building sector demand, according to the DOE. The totality of policies geared toward market transformation focus on either barrier reduction (standards and mandates; PUSH) or technological accessibility (incentives; PULL). Some also include a “lead by example” element that focuses on fostering EE markets, reducing risk for private investors, and reaping energy savings for the public.

2.1 Buildings Codes

Primarily the domain of state and local governments, building codes govern lighting, building envelopes, and HVAC systems, among other things, and are a key PUSH mechanism for increasing building EE.

The federal government can provide states with technical assistance and pass legislation (like the Recovery Act) that incent states to adopt the latest building codes. The failed Waxman-Markey bill would have mandated a national EE building code and financially punished stragglers.

Most states base their building codes on IECC and ASHRAE standards, though not all are pegged to the most up-to-date standards. Upgrading code with a “phased in” approach allows industry and retail markets to adapt over a period of time while stimulating EE markets, thereby allowing industry to capture cost reductions from the production economies of scale (8).

The local level can establish additional codes and is, more importantly, in charge of enforcement, though training and resources applied vary by jurisdiction. It can also strengthen EE markets by incenting (private sector) or mandating (public) LEED certification. 

Examining the evolution of standards over time shows the effectiveness of building codes. A cited McKinsey (2009) study indicates the 2009 IECC standards were 12-16% more efficient than the 2006 standards and suggests the projected 2012 standards would yield an additional 15% savings (10). 

California’s adoption of a statewide building code and appliances standards in the ’70s also validates the marked impact building codes can have on energy consumption. [It also strongly refutes (14) Jevons-style arguments against EE.]

YET, there are still 14 states stuck with 1998-2003 IECC while 13 states still use the ASHRAE 90.1-1999-2001 standard. There is also widespread lack of energy code compliance as many states lack the resources to comprehensively track code enforcement. Some suggestions for improving this include:

• employing third-party verifiers to spotcheck buildings
• hiring more building officials
• increasing their pay and training
• increasing the objectivity of performance-based code compliance

These strategies, suggested by the McKinsey study, would cost $210M-1B per year but would yield $3.5B in present-value savings (at the $1B estimate, if consistently invested over 10 years) (11).

2.2 Appliance Standards

By mandating standards across entire industries, we can reduce adoption costs while maintaining a level playing field. Standards also minimize the cost of efficiency because firms will naturally seek the most cost-effective ways of meeting the raised standards while remaining competitive. They can also help alleviate the split incentive.

The federal government continues to play the lead on this policy, having passed six key acts from 1975 to 2007 that set, expand, or ratchet up EE standards for appliance. 

This policy also exemplifies how successful public and private collaboration can be in tackling problems of efficiency; the Energy Policy Act of 1992 led the DOE to work directly with manufacturers, regulators, and consumer advocates as they developed standards that took economic and non-economic (national security, environmental) impacts on producers and consumers alike into account.

Fifteen states + D.C. have adopted residential/commercial standards above and beyond the national baseline. See again: California’s adoption of stricter standards in 1976 and its consequent impact.

2.3 Labeling and Education

Labeling is a federal-only approach, mandatory comparative labeling having been launched in 1980. There are two kinds:

• COMPARATIVE (eg: Energy Guide) - informs consumers about a product’s benefits relative to its class
• ENDORSEMENT (eg: ENERGYSTAR) - certifies a product that surpasses an efficiency threshold

The DOE estimated that ENERGYSTAR saved consumers $16B in 2007. The Energy Guide labels could be more effective if they were easier to understand. Both focus on efficiency rather than total consumption while segregating products by class, making comparisons imperfect and the “efficiency” label potentially misleading.

2.4 Financial Incentives

ie: policies that offer grants, loans, rebates, subsidies, and tax breaks to offset the high initial costs of adopting EE technologies. Additional goals differ by sector: with industrial/manufacturing, it is to impact the commercialization process early in order to reduce implementation costs; with commercial/residential/end-users, it is to educate the public and increase EE market penetration.

The chart on page 16 details various federal efforts focusing on the residential, commercial, industrial, manufacturing, and construction sectors. More recently, many of these incentives are focused upstream to optimize intervention costs.

There is also a large variety of state programs, many of which are cataloged at the Database of State Incentives for Renewable Energy and Energy Efficiency (DSIRE). One impediment for state programs is funding, though again, some utilize system benefits charges to maintain a stable cash flow for these projects.

At the local level, there’s the Weatherization Assistance Program which permanently reduces the utility bills of low-income houses by helping to fund one-time EE projects. And there are non-financial incentives like expedited permitting and density/height bonuses based on LEED certification. (The study also cites the now hamstrung residential PACE approach.)

Financial incentives can have their drawbacks. The public may perceive that the effort/cost of attaining an incentive outweighs its benefits. In other instances, the public may take advantage of an incentive even though they would have made a change anyway. These issues may be mitigated by larger incentives for higher and more expansive EE projects.