Investing in Energy Efficiency:Experience from California

Julie A. Fitch

Director, Energy Division

California Public Utilities Commission

Managing Energy Demand – Bern ’09November 4, 2009

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Presentation Overview

Introduction to California experience

• Regulatory / financial mechanisms for utilities

• Recent energy efficiency results

• Current energy efficiency activities

• Climate change context

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California: A long history of investing in clean power and energy efficiency

Yesterday…

… Today

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While the nation’s appetite for electricity has steadily grown, California has become a model of efficiency.

∆(2005)

= 4,000kWh/yr

= $400/capita

kWh/

pers

on

United States

California

Per Capita Electricity Sales (not including self-generation)

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Energy Efficiency Strategies• Flattening out the curve – yesterday

– Decouple sales from revenues– eliminate disincentive– Set and strengthen building and appliance standards– Invest in utility energy efficiency programs

• Bending the curve downward– tomorrow– Strengthen incentives– “Decoupling Plus”– Set long term goals to achieve durable, broad-based

reductions– Enhance strategic planning: work backwards from goals– Improve branding, messaging and marketing– Invest in workforce and research and development

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Presentation Overview

• Introduction to California experience Regulatory / financial mechanisms for

utilities

• Recent energy efficiency results

• Current energy efficiency activities

• Climate change context

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Decoupling: How it works• Utility revenues are de-linked from energy sales• Utilities submit revenue requirements and

estimated sales annually• Regulatory agency sets per-kWh rates by type

of customer• If sales are lower, shortfall is covered in

subsequent year• If sales are higher, excess revenues are credited

to customers

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Decoupling: Why it works

• Removes disincentive for utilities to encourage conservation, since revenues are not tied to amount of energy sold

• Aligns utility shareholder and customer interests for more efficient resource decisions

• Necessary, but not sufficient, to induce utility enthusiasm for energy efficiency

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Decoupling “PLUS”Utility shareholder incentives

• Financial rewards for utilities for successful energy efficiency

• “Shared savings” with consumers• Concept is to make financial return comparable

to investment in supply resources (generation, transmission, distribution)

• First tried in 1990s; new mechanism adopted in California in 2007

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Risk/Reward Incentive Mechanism basic concepts

• Cost of utility energy efficiency programs is subtracted from the value of energy saved each year

• If utilities reach a certain percentage of their savings goals, they are awarded a graduated percentage of these “net benefits” (currently set between 9 and 12%), up to a maximum cap, as additional revenues

• If utilities fail to reach required goals, they face potential for penalties

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Presentation Overview

• Introduction to California experience

• Regulatory / financial mechanisms for utilities

Recent energy efficiency results

• Current energy efficiency activities

• Climate change context

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Energy Efficiency Costs, Energy Savings and Benefits: 2006-08

Costs

Ratepayer Cost: $1.8B

Customer Cost: $ .9B

Benefits

Energy Savings: $5.4B

Total Cost: $2.7B Total Benefits: $5.4B

The Bottom Line:

Net Social Benefit = $5.4B - $2.7B = $2.7B

Return on Investment = 100%

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2006-2008 Savings

•Equivalent to three 500 MW power plants (one each year)•3 Million metric tons of CO2 equivalent

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Presentation Overview

• Introduction to California experience

• Regulatory / financial mechanisms for utilities

• Recent energy efficiency results Current energy efficiency activities

• Climate change context

The California Long Term Energy Efficiency Strategic Plan

http://www.CaliforniaEnergyEfficiency.com

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2010-2012 Utility Program Goals

• Savings Impacts Anticipated: – 6,965 GWH – 1,537 MW – 150.3 MMTherms– 3.07 million tons of CO2e emissions avoided

• Equivalent of 3 large power plants• Authorizes $3.1 billion in cost-effective

energy efficiency programs

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2010-12 Portfolio Highlights12 Statewide Programs• Cal SPREE (Statewide Program for Residential Energy

Efficiency) – existing homes• Commercial: Benchmarking• Industrial: Continuous Energy Improvement• Zero Net Energy New Construction• Heating, ventilation, & air conditioning: Focus on

compliance• Statewide Marketing, Education & Outreach• Six other Statewide programs: Agriculture; Building Codes &

Appliance Standards; Emerging Technologies; Lighting Market Transformation; Integrated Demand Side Management; Workforce Training

• Plus Other Localized Programs: government partnerships; individual utility and 3rd party programs, and pilot projects

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Zero Net Energy Buildings• Advanced Home Partnership - $63.2 million

– Aims toward Strategic Plan 2011 milestone: 50% of new homes exceed existing building standards by 20%; 10% exceed by 40%• 15% above 2008 building code• Calculated incentive structure up to 50% incremental cost

– Emphasizes “green” marketing- leverage existing consumer awareness

• Zero Net Energy Pilots – $43.16 million utility programs – $60 million for innovative local government programs focused on

Advanced Building (“Reach”) Codes and GHG Action Plans

• Commercial buildings – 100,000 building statewide benchmarking target (2010-2012)– “Path to Zero” Commercial Buildings Collaborative

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Other Portfolio Highlights • Advanced Lighting Programs (53% of total lighting budget)

– $89 million (LEDs, specialty/super CFLs, halogens); $78 M - CFLs– 2020 Strategic Lighting Plan Work Group

• Codes and Standards Programs– New Compliance Enhancement Program

• training/support to building officials; • streamlining permitting and compliance requirements; • enhanced certification processes; Focus on HVAC

– Reach Codes; coordination at state level and with voluntary codes

• Heating, Ventilation and Air Conditioning– Compliance focus: certification and training, CA specifications, quality

installation and maintenance

• Industrial – certification/pilots on energy management

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Marketing/Brand that engages moves customers to take action

• New or Revised Clean Energy Brand (2010)• Interactive EE Web Portal

– exchange expert resources & engage average citizens– Will utilize social networking techniques

• Variety of in-language marketing and outreach programs

• Universal Integrated Audit/Survey Tool• Behavioral Programs

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Financing Funds - Growing• Additional financing of US$8 - $25 billion needed

– for efficient hardware alone 2010 -2020

• Statewide Utility On-bill financing (OBF): – For commercial and institutional customers– Initial $41.5 million in new funds for OBF loan pool – Common loan caps and terms

• Utility program coordination with municipal property-based financing– linked to national economic stimulus funds/retrofit programs

• CPUC/State Treasurer’s office collaboration on state facilities

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Economic Impact of Energy Efficiency Programs 2010-2012

• 15,000 – 18,000 new “green collar” jobs in 2010-2012 over 2006-08– 6,000 – 10,000 jobs in Residential Retrofit alone

• $122 million budgeted for workforce education

*Job benefits calculated based on Council of Economic Advisers’ May 2009 publication of “Estimates of Job Creation from the American Recovery and Reinvestment Act of 2009”

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McKinsey and Co’s Compelling Case for Energy Efficiency as U.S. Climate Action

• U. S. National Potential:– 23% reduction in end use energy consumption– Reduce 1.1 gigatons GHG (15% of US 2005 emissions) – $1.2 trillion in gross energy bill savings (Net Present Value)– $540-630 billion net savings (NPV) after EE investment &

program costs*

• Strategies Needed: – Comprehensive, innovative scale approaches to “unlock” EE in

100 million buildings, with billions of devices• Biggest challenges:

– up-front funds, fragmented stage, stakeholder alignment, low “mind-share”

* (@ 10-30% of investment)

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Presentation Overview

• Introduction to California experience

• Regulatory / financial mechanisms for utilities

• Recent energy efficiency results

• Current energy efficiency activities Climate change context

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California Global Warming Solutions Act of 2006 (AB 32)

• 2010: emissions at 2000 levels

• 2020: emissions at 1990 levels

• 2050: emissions 80% below 1990 levels*

- Covers all major emitters, to be defined by California Air Resources Board (ARB).

- Covers all major greenhouse gases (GHGs).*Set in Executive Order S-3-05, June 2005.

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California’s Greenhouse Gas Emissions (480 MMTCO2E)

Source: CEC 20%6%

40%

6%3%

12%

13%Elec. Gen. (Imports)

CommercialResidential

Transportation

AgricultureIndustrial

Elec. Gen. (In State)

CARB 2007

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Electricity-Related Emissions: Imports

Source: CEC (for electricity sales); CARB (for emissions inventory)

2004 Electricity Sales (MWh)

In-State Generat-

ion77%

Imports23%

Emissions (MMT CO2e)

In-State Generat-

ion44%

Imports56%

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California’s Climate Policy Road Map

• Required by AB32• Adopted by California Air Resources

Board (CARB) Dec. 2008• Targets 174 MMtCO2e reduction

from BAU• Multi-agency effort led by CARB• CPUC provided formal

recommendation of strategies for the electricity and gas industries

• Lays out comprehensive regulatory program

• Combines mandates with market based measures

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A Role for GHG Trading…

Reduce Demand

ChooseCleaner Supplies

StimulateTechnologicalInnovation

GHGTrading

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… And for Mandatory Measures

Reduce Demand•Energy efficiency•Advanced metering/demand response•Water conservation

Choose Cleaner Supplies•Loading Order•Renewable Portfolio Std.•CA Solar Initiative•Emissions Performance Std.

Promote Technological Innovation•RD&D investments•Standards

31Cap and Trade

33% Renewable Portfolio Standard

Solar PVOther

Mandates

Energy Efficiency

Transportation Mandates

26.4M

Electricity/Gas Mandates:49.7 MMTCO2E

Total Reductions from 2020 BAU: 169 MMTCO2E

2.1M

21.2M

Source: CARB Proposed Scoping Plan

Nearly 40% of reductions from mandates are from electric sector programs

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Efficiency andDemand Response

Renewable Energy

Clean and EfficientFossil-fired Energy

California’s Loading OrderStaged priorities for procurement

of new resources

Mostly command and control mandates

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Aggressive EE/GHG Goals

California Air Resources Board Scoping Plan Target (Nov, 2008): – 32,000 GWh and 800 MMTherms/year by 2020

– 19.5 MMT CO2E in 2020

CPUC 2020 interim energy efficiency goals (July, 2008): – 16,000 GWh and 620 MMTherms/year– Equal to nine or ten power plants avoided

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Climate/EE Policy Issues Ahead for California and the U.S.

• Demand-side management (DSM) strategies not part of Cap and Trade; no mechanism to sell GHG benefits from DSM– Cap and trade places limits on sources of GHGs; demand-side

strategies not directly integrated into cap and trade.– GHG emission price will make more DSM “cost-effective”– “Offsets” typically allowed outside the capped jurisdiction only

• Local Governments can influence building and transportation, but how to pay for actions?

• Allowance auctions may provide EE funds to expand programs &/or creative allowance “retirement”

• EE Institutional challenge: Need broad vision, strong and clear leadership, over sustained period – to overcome ”friction” of diffuse markets and action venues

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Thank You

Julie A. Fitchjf2@cpuc.ca.govwww.cpuc.ca.gov