US Midwest dives into energy efficiency in 2007


By Alicia Ward


The US Midwest

In November, twelve governors and one Canadian premier signed the Energy Security and Climate Stewardship Platform, which commits each state to meeting 2 percent of annual electricity and natural gas consumption through efficiency resources by 2015. The Platform, an initiative of the Midwestern Governors’ Association, will be implemented at the state level.

Under the bipartisan leadership of governors Tim Pawlenty of Minnesota and Jim Doyle of Wisconsin, the Midwest will soon begin meeting projected demand increases with energy efficiency, and over time, reduce demand below current levels. This significant commitment to energy efficiency will stimulate the Midwest economy, create new jobs, reduce greenhouse gas emissions and position the Midwest as a leader in the clean energy economy.

Minnesota, Iowa, and Wisconsin have historically led the Midwest region with long standing commitments to energy efficiency. With a variety of policies in place, each state requires its investor-owned utilities to invest in energy efficiency resources and in these states, utilities are currently saving between 0.7 – 1 percent of annual energy load.

Both natural gas and electric utilities are required to submit energy efficiency plans to the Iowa Utilities Board. These plans include programmes for all customer classes, demonstrate cost-effectiveness, analyse the potential for energy efficiency, and establish performance standards for energy and capacity savings. With investment in energy efficiency since 1990, Iowa’s investor-owned utilities are reducing electric load growth by 2 TWh annually, and reducing natural gas use by 7 billion cf. That is enough electricity to power 200,000 average homes for a year and enough gas to heat 85,000 homes for the same time period. Annual investment in energy efficiency in 2006 was $99 million for investor-owned utilities, and $11 million for municipal utilities and rural electric coops.

Governor Chet Culver made energy issues one of his top priorities in 2007. The Iowa Power Fund bill reinforces the state’s history of supporting energy efficiency. Among the provisions are the creation of a new Office of Energy Independence, charged with developing an energy plan for the state; requiring the Iowa Utilities Board (IUB) to review the existing utility-operated energy efficiency programmes and to make recommendations for improvement; directing the IUB and Iowa Energy Centre to conduct a survey of consumer knowledge of energy efficiency programmes and to make recommendations; and creating the Iowa Power Fund to foster research and development of renewable energy, energy efficiency, and greenhouse gas reductions. As a signatory to the MGA Platform, Iowa is poised to make additional gains in energy efficiency in 2008.

Minnesota’s Conservation Improvement Plan (CIP) requires investor-owned utilities to invest a percentage of their revenue in energy efficiency programmes and already achieves significant savings. In 2003, Minnesota’s investor-owned utilities invested $65 million in energy efficiency, and municipal and rural electric cooperative utilities invested about $26 million. That spending was $77 million on electric efficiency and $14.2 million in natural gas efficiency programmes, with verified savings of 328 GWh of electricity and 1.78 billion cf of natural gas, or 0.8 percent of retail electricity sales and 0.5 percent of total natural gas consumption. In 2007, the state went a step further with the adoption of the Next Generation Energy Initiative, which includes a 1.5 percent annual energy efficiency standard for the state’s electric and natural gas utilities. The new law roughly doubles the state’s electricity efficiency requirements and triples the natural gas requirements for utilities. Energy efficiency measures in Minnesota could save 6.5 TWh of electricity and 40 billion cf of natural gas by 2020, 10.3 percent and 9.8 percent of projected annual use respectively, presenting a significant opportunity for expansion of current efficiency programmes as well as development of new programme opportunities.

The state’s current public benefit fund, Focus on Energy, was established in 1999 with authorisation to invest $66 million per year for energy efficiency programmes. In 2007, the programme saved 249 GWh of electricity and 1.5 billion cf of natural gas. A 2006 law updates the state’s efficiency policy, increasing funding for the state’s Focus on Energy Programme to 1.2 percent of utility annual operating revenue (approximately $91.5 million per year). This investment in efficiency programmes is projected to save 657 GWh of electricity in the year 2012.

Facing double digit electric rate increases in 2007, Illinois adopted the Affordable, Clean Energy Standard, to help protect consumers against rising electricity bills. The policy establishes a 2 percent efficiency standard for the state’s electricity utilities. The investor-owned utilities in Illinois have not previously invested in efficiency resources and the phase-in of the 2 percent standard increases quickly, which will require significant support to develop and implement cost-effective programmes. The standard could save 217 TWh of electricity, or 12 percent of projected load, by 2021.

Ohio and Michigan poised for action
The Midwest’s industrial states are recognising the significant potential for economic development through investment in clean energy technology. Facing a severe economic crisis, Michigan governor Jennifer Granholm is supporting a clean energy policy that is expected to include an energy efficiency portfolio standard of at least 1 percent annually for natural gas and electric utilities. Michigan’s energy efficiency legislation passed out of the House Energy Committee by a vote of 17–1 in February and the House is expected to take up the legislation this month. Any successful legislation that passes the House will have an uphill battle in the Senate, however.

Ohio’s governor Ted Strickland announced his Energy, Jobs Progress Plan in 2007, which includes a provision for the state’s electric utilities to meet 25 percent of their load growth with efficiency resources. The plan is under consideration in the state legislature. The House appears to have an interest in increasing the efficiency standard. More work will occur throughout the session in early 2008.

Indiana and Missouri make strides
Lacking the infrastructure for statewide efficiency policy, both Indiana and Missouri are addressing efficiency through rate cases. Investor-owned utilities in both states are pursuing energy efficiency resources at increasing levels. In Indiana, the state’s gas utilities are investing approximately $12 million per year in efficiency resources, while the state’s electric utilities are investigating the potential for efficiency and planning for future investments. Missouri’s utilities are implementing energy efficiency programmes, with approximately 30 percent of the state’s utilities reporting to the state Department of Natural Resources (of 32 percent that responded to the DNR survey) that they are engaged in energy efficiency programmes, but no compiled statistics on energy savings are available for these utilities.

When the deregulation wave swept the region in the 1990s, baseline investment in energy efficiency plummeted. Upper Midwest states – Minnesota, Wisconsin and Iowa – that did not restructure their energy markets, took on a leadership role in efficiency by maintaining stable funding and keeping their traditional demand side management programmes (DSM) as a requirement in their Integrated Resource Plans (IRPs). These three states and the small level of investment that has occurred in the remaining Midwest states – Illinois, Indiana, Michigan, Ohio, Missouri and Kentucky – on a pilot or demonstration basis represented until 2006 roughly $340 million in annual investment in energy efficiency. That baseline of funding, protected and cultivated by the upper Midwest states, and contributed to modestly by the remaining Midwest states, is expected to balloon to nearly $1 billion in annual efficiency investment by 2011.

As the region braces to absorb and adjust to the infusion of resources, and manage the shift from supply side to demand side solutions, there are real opportunities and challenges. Regional coordination will be essential to manage the challenges and take full advantage of the opportunities so that rate payer, shareholder and tax payer dollars that support this new efficiency renaissance are optimised for greatest impact. Opportunities exist to make energy efficiency a central component of a Midwest marketplace that leads in workforce development and job creation, economic revitalisation, and to help mitigate the current 5 percent of global emissions that the Midwest represents in the global marketplace.

Leadership from the Upper Plains states: transfer of lessons learned
Utilities that have consistently administered efficiency programmes in Iowa, Minnesota and Wisconsin will need to share lessons learned with those states in the region that are new to or renewing their programme administration. Illinois, Michigan, and Ohio need help meeting aggressive efficiency goals. The in-house expertise that existed in those states in a previous era of DSM programmes has evaporated in the wake of deregulation and the infrastructure for administering programmes will need to be rebuilt. Both will happen over time – with oversight by the public service commissions and with legislative mandates to achieve specific levels of savings – but if rate payer dollars are to be used to greatest effect, it is essential that these states leapfrog their previous performance. A big incentive to do just that exists in the form of expectation.

In Illinois, the expiry of a 10-year rate freeze and the subsequent market-priced power auction led to residential electricity bill increases of as much as 50 to 200 percent. The public uproar over this issue led to legislative and executive intervention and the eventual adoption of the previously described energy plan, which included energy efficiency and renewable energy standards for the state. Michigan and Ohio, which also deregulated, find themselves facing an uncertain future for making investments in new generating capacity. These circumstances make those states more likely to listen to the lessons that are about to be shared.

Innovative programme design: Next step for progressive states
In those progressive states that have been administering programmes for years and that have harvested their initial low-hanging fruit, innovative programme design will help them to accomplish their stated goals. Minnesota has achieved a consistent 0.5 – 1 percent load reduction in both its gas and electric service territory. To capture the 1.5 percent that is required of both gas and electric utilities, regulators will see new programme designs that more fully integrate low-income programmes with standard offer utility programmes, building codes, appliance standards, and market preparation and transformation. Minnesota, Iowa, and Wisconsin will be the innovative laboratories of cutting edge efficiency programming by 2011.

Lessons from other regions of the country are sure to make their way to the Midwest region as well. California, New York, and the Pacific Northwest have demonstrated an impressive ability to deploy massive amounts of efficiency funding and achieve measurable savings for both consumers and the system. Historically, the Midwest has been somewhat reluctant to try ideas from other regions of the country. Now that utilities are being asked rather bluntly to accomplish unprecedented savings of energy those regional biases will slide by the wayside.

Innovative regulatory mechanisms that value efficiency
Myriad disincentives exist that prevent utilities from aggressively pursuing all cost effective energy efficiency. As the regional leadership moves to set aggressive targets and states ramp up to meet those goals, innovative regulatory mechanisms that allow both for cost recovery of utility expenses in efficiency programme administration and incentives for exceeding performance will be more prolific. Strategies that decouple rates from throughput are already gaining momentum and are being piloted across the region. The challenge is to allow for experimentation and failure of innovative regulatory mechanism in order to find strategies that can work in different places. Doing so will allow regulators to pick and choose from a toolkit of successful policies that meet the varied needs of their respective states.

Partnerships that move beyond the politics of posturing
Finally, and perhaps the most challenging shift that needs to occur in the region in order to make energy efficiency a viable and successful resource on par with other generating and transmission assets, is to set aside the politics of the past and embrace the possibility of a new future. The current gridlock of rate payer advocates, environmental organisers, renewable developers, and traditional fossil fuel-based generation, transmission and distribution companies does not lend itself to success. In recent days, however, that impasse has begun to change. Advocates and utilities have come together in an odd-bedfellows-agreement that energy efficiency is perhaps the one thing on which they can agree.

The recent Illinois legislation is a manifestation of that change. In 2007 a conversation that was born of rate increases and mistrust among all parties, miraculously gave birth to some of the most progressive legislation on energy efficiency in the country. Perhaps a new day is dawning.