With an ever increasing demand for electricity, and in anticipation of rising costs to both the environment and the consumer, efforts to address energy efficiency are being stepped up in the USA.

Rick Tempchin, Edison Electric Institute

According to the United States Energy Information Administration, in 25 years the US is projected to be using close to 50 per cent more electricity than today. While the bulk of this demand increase will be met through the traditional methods of building more power plants, transmission, and distribution lines, utility industry structural change, rising fuel costs, and growing public concern over the environment, have all increased the value of energy efficiency as a resource for meeting customer demand. At the same time, advances in electric metering, two-way communication, and electric appliances and technologies are rapidly creating cost effective tools for managing energy demand and use. The goal now is to create the business and regulatory models that can enable these technologies to make energy efficiency a sustainable business for electric utilities.

Promoting efficiency

The idea of energy efficiency is not new and electric utilities have promoted efficiency to their customers since the 1970s. Encouraging customers to use innovative appliances and technologies that offered greater efficiency, utilities have also urged consumers to conserve power during heat waves by turning up air conditioning thermostats and offering financial incentives to shift usage to off-peak demand periods. Between 1989 and 2004, electric utilities spent over $28 billion on efficiency programmes which saved about 736 TWh of electricity.

Electric equipment and appliances are becoming more efficient while two-way communication and automation technology are rapidly improving information exchange between utilities and their customers. ‘Smart’ technologies and appliances hold the promise of increased functionality and greater control over electricity demand.

When coupled with innovative approaches to both tariffs and rate design, efficiency, demand response, and smart technologies can not only expand the industry’s portfolio of options available to meet demand, but can also more closely align competitive wholesale markets with regulated retail markets, becoming the foundation for a dynamic partnership between utilities and consumers.

Guiding principles

Over the past year the Edison Electric Institute (EEI) and its members have focused on developing principles for guiding the industry in working with regulators, lawmakers, customers, and other stakeholders to achieve a modernized vision for energy efficiency. The following eight guidelines have been adopted:

  • Provide customers with new options to take advantage of wholesale price variations: Innovative ratemaking and rate design coupled with smart meters and electricity system technologies can give customers greater control over their energy bills. At the same time, a demand-responsive market improves grid operation, leading to cost savings. Additional benefits may include enhanced system reliability and customer service functions, and system performance monitoring and management. Smart metering and electricity systems are also a gateway to a host of new high efficiency technology opportunities.
  • Recognise the positive role of new technologies: Ongoing advances in electricity supply, transmission, distribution, and end-use technologies are increasing efficiency, productivity, fuel diversity, control, service, pricing and lifestyle opportunities. Technology research, development, and deployment should be encouraged.
  • Recognise opportunities to include efficiency into the resource portfolio: Industry should investigate opportunities to make energy efficiency part of the utility resource portfolio. These opportunities should accommodate alternative retail market structures, improve planning processes, discourage unneeded complexity and uncertainty, and recognise risks.
  • Make energy efficiency a good investment: The industry should work with regulators to create performance-based incentives tied to objective benchmarks that compensate for lost revenues, allow for cost recovery and provide a bonus for achieving goals. The goal should be a reasonable assurance of cost recovery through advanced regulatory approval, while minimizing upward pressure on rates.

  • Make efficiency sustainable: The industry should seek market and business processes that will provide long-term encouragement for customer acquisition of high-efficiency technologies. Balance, though, must be achieved between the cost of industry provided customer investments and the impact of those investments on other customers and other needed investments. Tariff design is a valuable method of encouraging efficiency, and should as a first priority recover costs and deliver accurate price signals.
  • Develop cost effective national appliance efficiency standards and building code: Cost-effective and forward-looking standards based on the point-of-use can provide substantial energy savings. Use negotiated and consensus standards where appropriate to encourage market fairness.
  • Understand that efficiency is everyone’s business: Energy efficiency delivers benefits to everyone and achieving it is everyone’s responsibility. Utility costs for efficiency programmes should be shared in proportion to benefits received. Federal funding and incentives are needed to provide leadership and direction to national energy policy.
  • Recognize states’ authority: States are the primary authority for development and implementation of regulated utility programmes. Each state’s methods may vary depending on retail costs, market factors, industry structure, regional electric system organisation, state policies and resource availability. State methods must be consistent with retail and wholesale market structure in each state, but may include integrated resource planning, state administered organisations, regional transmission organisations/independent system operator-based systems, or others. Methods determined by consensus negotiations typically result in the best outcomes. Within the states, mandatory state-wide efficiency programmes should be available to all customers in the state, including customers of government-owned and cooperative providers.

Cumulative energy savings from US electric utility Demand Side Management (DSM) Programmes 1989-2005 (Million kWh
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In the short term, EEI and industry aim to seize a wide range of opportunities to improve energy efficiency. These focus on a number of key areas:

  • Fostering smart and efficient buildings: Homes and commercial buildings account for over two-thirds of US electricity use and over one-third of natural gas use. The industry currently encourages energy-efficient construction and remodelling through measures such as online energy audits and construction programmes that offer incentives and training.
  • Promoting smart and efficient appliances and equipment: Home appliances and commercial equipment represent the fastest growing use of electricity. EEI advocates stronger and accelerated federal appliance efficiency standards and greater tax incentives.
  • Accelerating the development of smart meters and advanced metering infrastructure: Smart meters and two-way communication technologies enable customers to respond to prices, opening the door for cost savings. These technologies also give utilities the capability to lower costs and improve reliability. The industry is working to create and strengthen coalitions with stakeholder groups to increase the use of this technology among member companies.
  • Supporting the development of innovative rates and regulation: Innovative ratemaking and rate design will be essential for customers and utilities to reap the full benefits of energy efficiency. To achieve this, the industry is encouraging new regulatory constructs and business models that will enable energy efficiency and demand response to be not only good policy, but also good business.

Policy drivers

Efficiency-related measures in the Energy Policy Act of 2005 (EP Act) complement industry’s efforts to expand the potential of energy efficiency to meet future customer demand for electricity. Provisions in the energy law include directing the US Department of Energy (DoE) to establish efficiency standards for consumer and commercial products, providing tax credits for energy efficient homes, renewable energy improvements in existing homes, and buying energy-efficient appliances and requiring an assessment of federal building energy efficiency standards. In addition the Act directs states to consider net metering, fuel diversity, fossil fuel generation efficiency, smart metering and demand response matters, often with federal assistance.

The Act also requires the DoE and the Federal Energy Regulatory Commission (FERC) to prepare a report assessing several advanced metering and demand response topics, including market penetration of advanced metering and demand response programmes.

In its February 2006 report, the DoE found that limited demand response capability exists in the US. In 2004, potential demand response capability equalled about 20 500 MW, three per cent of total US peak demand, while actual delivered peak demand reduction was in the order of 9000 MW (1.3 per cent of peak).

Last year, FERC hosted a technical conference on demand response-related topics, examined existing reports and related literature, and conducted a first-of-its-kind survey on advanced metering and demand response implementation. The Commission said the primary conclusions from its report are that while demand response is important for both wholesale and retail market performance current demand response capability represents 3 – 7 per cent of peak demand in most regions while penetration of enabling technologies, such as advanced metering, is small.

Efficiency cloaked

The nation’s electric utility industry has long recognized the value of energy efficiency but the challenge is to find a way to enable energy efficiency to return even more value. With principles in hand and short-term goals to act as a guide, by working with regulators, customers, manufacturers, policy makers and other stakeholders, the Edison Electric Institute is confident that will occur.

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Rick Tempchin, director of Retail Distribution Policy at the Edison Electric Institute, calls on all stakeholders to promote energy efficiency