Time to Assess Ambitious Energy Efficiency Plans

By Cynthia A. Arcate 5 January, 2012

Massachusetts has a long, successful history of energy efficiency programs and there are many reasons to ensure that continues. But the state cannot make the kind of financial investments that it has made (currently more than $1 billion over three years) and not closely examine the costs and impacts on customers. The costs are significant and the savings do not directly offset the cost, as suggested by the numbers touted by the Department of Energy Resources and the Department of Public Utilities.

The mismatch of claimed savings and cost is simple. The cost is collected from customers now, while the savings are accrued over the lives of the many measures installed under the program. In most cases, that can take five or 10 years or more. This is, in rate parlance, called an intergenerational inequity. That simply means that customers today pay for a benefit they and customers of the future receive tomorrow.

When the first comprehensive energy efficiency programs were rolled out over 20 years ago, there was much discussion and debate about whether the investment should be amortized to spread costs over the years to match actual value to customers even though the overall cost would be higher because of the return paid to the utility for the unamortized expense. At the time, before the vast energy market restructuring in the late 1990’s, utilities with newly commercialized nuclear power plants resisted putting these expenses on their books and favored transferring the costs directly to customers. The utility also provided all of the electricity supply to the customer so, in theory, there was no intergenerational inequity since all current customers benefited from the reduction in the need for more energy.

But that was then and this is now. The world has changed. In the 1997 Restructuring Act, energy efficiency spending was capped at roughly $125 million per year. Jumping to three year plans at a cost of $1 billion so quickly from that humble point clearly warrants rethinking about how and when these funds are collected. If future investments are amortized, providing utilities a rate of return, then it will be important to rethink utilities’ energy efficiency incentives to make sure they don’t earn more on the programs than is warranted.

This is just one of many issues regulators and legislators must examine.

The business community, including PowerOptions on behalf of our 500 non-profit organizations, cities and towns and state agencies, will be raising this and a number of other issues which go to the heart of the claimed value of these expenditures. It is important to note that this challenge should not be perceived as opposition or a lack of commitment to energy efficiency. To the contrary, the commercial and industrial sector contributes the lion’s share of the energy savings under these programs and benefits from roughly 80 percent of the spending.

The beginning of a new year is a fitting time for the DPU, the Energy Efficiency Advisory Council and the Legislature to each begin the process of assessing the success of the three-year energy efficiency plans.

These plans were put in place two years ago so this examination should be incorporated into the next three year plans to be designed over the next 10 months. All three bodies are doing just that. The process should be welcomed; it should be rigorous and must be open to new approaches as well as questioning of the underlying assumptions that supported the budget and program design.

The state’s challenge is to make the system fair and financially sustainable for another 20 years and ensure our long, proud history of energy efficiency continues.

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