The Need
Many electric and natural gas utilities currently have a disincentive to aggressively pursue and promote energy efficiency, demand response programs and other measures as a result of existing regulatory and ratemaking structures. In order to truly prioritize energy efficiency as a resource, removing these regulatory barriers is critical.
Aside from changing the regulatory structure, portfolio standards have been adopted by many states as one way to promote energy efficiency in the power sector. Under a federal Energy Efficiency Resource Standard (EERS), retail distributors would be required to obtain energy savings from customer facilities, distributed generation installations, or their own distribution systems in amounts equal to a specified percentage of base year sales of electricity (energy) or natural gas. The requirements apply to retail distributors, including unbundled distribution utilities or fully integrated generation and distribution utilities that have annual sales over a set level of megawatt hours of electricity or cubic feet of natural gas.
The single best way to promote energy efficiency in the power sector is to set a price on carbon dioxide emissions. As energy efficiency is the most cost-effective option for reducing emissions, the price signal will drive energy efficiency. A cap-and-trade program provides maximum flexibility to power companies to reduce emissions through energy efficiency. Because of the flexibility it provides, a cap-and-trade approach would be a much better driver of energy efficiency in the power sector than a portfolio standard.
Solutions
- The federal government should clarify that energy efficiency is a priority resource and encourage the alignment of state regulations and ratemaking with the delivery of cost-effective energy efficiency and demand management programs.
- The federal government should establish a mandatory cap and trade program to put a price on carbon, reduce emissions of greenhouse gases, and drive energy efficiency. If, in order to garner sufficient political support for a meaningful cap and trade proposal, Congress decides to include a national portfolio standard, such a portfolio standard should be a low-carbon standard, allowing for a wide variety of responses, including energy efficiency.
