NEEP urges states to make efficiency part of winter energy strategies
The headlines have been stark: in the wake of the Gulf hurricanes, Northeast residents can expect to pay about 35 percent more in home heating oil costs this winter and upwards of 50 percent more in natural gas costs. And, because some 40 percent of the electric generation in our region is fired by natural gas, we can expect to pay 25 to 30 percent more for our electricity this winter as well.
The picture for businesses is, in some cases, worse. Small businesses that didn't secure long-term electric supply contracts in the post-restructured energy environment are also at the mercy of "basic" or "default" service contracts, and can expect their electricity costs to rise anywhere from 50 to 80 percent.
And, if the added expenses we're all facing weren't bad enough, consider that ISO-New England – the region's electric grid operator – is warning that they may have to impose rolling blackouts if a prolonged cold snap hits the area. With natural gas supplies still restricted from the Gulf hurricanes, and not expected to be back near normal capacity until March, according to the federal Department of Energy, owners of gas-fired power plants could curtail operations either because the price of gas is too high to make money in their generation operations or because they could conceivably resell the gas they've already purchased and make more money on the open market.
Under these circumstances, many have expected that public policies supporting increased investments in energy efficiency would gain new support in Northeast states. Unfortunately, some recent actions have sent mixed messages for energy efficiency.
For example, Massachusetts environment regulators were pressed by ISO-New England and power generators to allow several power plants across the state to burn more oil and decrease their gas usage during the winter peak, without first having to show that all cost effective energy efficiency had been captured to lower demand. Fortunately, just last week, those regulators denied the request.
States enact emergency measures
In other cases, state policymakers, driven to take action to supplement the budgets for emergency home heating assistance measures, have diverted funds from the systems benefit charges (SBCs) that are intended to fund energy efficiency programs.
The Massachusetts Home Energy Assistance and Tax Relief Act (HEAT), signed into law in November, provides an emergency one-time state supplement of $20 million to the federal Low Income Home Energy Assistance Program (LIHEAP) to assist low-income elders, working families and other households with the purchase of heating oil, propane and natural gas and electricity and other primary or secondary heating sources.
Given federal funding shortfalls in heating assistance programs, such emergency action on the part of states is vital to keep our most vulnerable citizens from having to choose between heat and food.
Other sections of the HEAT Act boded well for energy efficiency. The system benefit fund charge of 2.5 mills per kWh to fund energy efficiency programs was renewed for another five years, though NEEP and several other energy efficiency advocates had called for a restoration of the SBC to former funding levels of at least 3 mills, and had argued for an expansion of SBC programs for natural gas and oil heat customers as well, two measures that failed to gain sufficient legislative support.
The HEAT Act also used tax policy to try to advance energy efficiency by providing a one-time tax credit for homeowners who purchase energy-efficient heating products equal to 30 percent of the cost of the products up to $600 for a single family home and $1,000 for a multi-family home. Examples of eligible products include new windows, advanced programmable thermostats, insulation, weather stripping and fuel-efficient furnaces, boilers and hot water systems.
The Act also established a one-year, zero interest loan program to help residents improve the efficiency of their homes. Unfortunately, the funding for that loan program - to be no less than $5 million for the next year - is slated to come out of the state's SBC funded energy efficiency monies.
A similar situation occurred in New Hampshire, where on November 16 Gov. John Lynch signed into law legislation to provide up to $10 million in additional assistance for the Low-Income Home Energy Program in case the federal government does not meet its responsibility to provide adequate LIHEAP funding. The act also provides additional funding to serve up to an additional 30,000 households through the state's Electric Assistance program. To fund that program the act authorizes transfers of $3 million in SBC funds from energy efficiency programs. Technically, the state will "borrow" the money from Public Service of New Hampshire, one of four utilities that administer the state's energy efficiency program, which would in turn pay itself back over the next three years.
Connecticut, New York act as well
Other states have also taken emergency actions to supplement home heating assistance programs with efforts to improve energy efficiency. In Connecticut, Gov. M. Jodi Rell on October 31 signed into law Public Act 05-02, enacted during an emergency session to increase benefits under the Connecticut Energy Assistance Program (CEAP), which helps low income households pay their heating bills. It also establishes a new program to provide furnace tune-ups and other energy efficiency services and exempts certain energy-efficient products from the sales tax from November 25, 2005 to April 1, 2006. The provisions became effective on December 1, 2005.
The governor also directed all state and quasi-public agencies to achieve a 10 percent reduction in energy consumption in all buildings owned, leased or operated during the 2006 calendar year.
Finally, in New York, Gov. George Pataki in September called on the legislature to adopt his nine-point Strategic Energy Action Plan, of which the governor said: "We also need to move toward greater energy efficiency. This energy plan not only offers immediate energy savings for residents and businesses, but also sets a course that will improve energy efficiency and help us to decrease our dependence on foreign fossil fuels."
In addition to offering a home heating tax credit for the elderly, additional home energy assistance for elderly and low-income households, and energy assistance to small businesses and farmers, the measure also proposed tax credits for upgrades to home heating systems, and a "sales-tax-free-week" on the purchase of qualifying Energy Star appliances, weather stripping, caulk, or insulation.
Energy efficiency program funds remain vulnerable
Yet, despite the best intentions of policymakers to address the emergencies our region is facing this winter, these actions also serve to underscore the vulnerability of public benefit-funded energy efficiency programs in the states. Connecticut's SBC-funded energy efficiency programs, for example, are still under funded from their levels of two years ago, when the legislature and then Gov. John Rowland diverted some $37 million from the fund to help balance the state's budget. A securitization of those funds (a measure agreed in order to save approximately $50 million of the original $87 million in the state's Conservation and Load Management Fund) came due this year, and further siphoned off energy efficiency funds to go toward the note on the securitized borrowing.
In New York, the governor had to turn back a legislative effort this year to take control of the budgeting of energy efficiency funding, which would have led to program uncertainties from year to year, with accompanying lack of effectiveness.
The systems benefit charges in the Northeast states are collected by the utilities from ratepayers - across all customer classes - and allocated by the state regulators to fund energy efficiency – across all customer classes. These funds are not tax dollars, but increasingly are treated as such. And the more states engage in the practice of diverting the funds to causes other than those which they were raised to fund, the easier it becomes to go back and do it again and again.
Additional longer-term policies to increase efficiency are needed
In presenting comments regarding energy efficiency in several different policy forums this fall and winter, NEEP has emphasized that, unless we want to be back again in the same spot next winter, we need to do more than provide emergency assistance to help the most vulnerable. Moreover, we need to shift our view of energy efficiency from simply a "public benefit" to treating it as a reliable, cost-effective resource to help meet our energy needs. To do this requires new long-term policies to advance energy efficiency. Policy options beginning to get serious consideration include:
Energy Efficiency Portfolio Standards - States can adopt rules governing the procurement of electricity resources for default/basic service customers that require all gas and electric retail service providers to procure a certain percentage or amount of lower cost efficiency resources through an Energy Efficiency Portfolio Standard (EEPS). EEPS goals are currently in place or under development in several states, including New Jersey and Connecticut. An EEPS goal can be set as either: (1) a percentage of load growth or base year sales, or (2) as a fixed number of units of energy savings.
In addition to being able to deliver a specific amount or level of energy efficiency resources and capturing a significant portion of all cost-effective efficiency without increasing systems benefit charges, and EEPS is also to – and can compliment – the renewable portfolio standards that many states have established.
Portfolio Management - An alternative to an EEPS is a more comprehensive procurement approach which would involve the adoption of rules to govern the procurement of electricity resources for default/basic service customers by ensuring the least cost mix of demand and supply resources over the long term, and directing default electricity and gas providers to procure all or a significant portion of cost-effective energy efficiency before procuring more expensive supply resources. A number of western states, including California, currently employ such a "loading order" requirement of default service providers. Portfolio management alone could capture enough cost-effective efficiency to offset load growth and beyond.
Rate design - Distribution companies in Northeast states recover their cost through rates based on sales volume (i.e., kWh sales). The more energy customers consume, the more profit distribution companies can earn. This rate design, unfortunately, is a disincentive to distribution company promotion of energy efficiency even if it is the least cost strategy to meet service needs and keep energy bills affordable. Decoupling distribution company profits from sales volume would remove this disincentive. State utility commissions can address this through several different mechanisms. The California PUC, for example, established a decoupling mechanism that each year "trues-up" base rate revenues based on actual kWh sales compared to projected kWh sales (with appropriate adjustments for weather, etc.)
In addition, public utility commissions could introduce customer rate designs that give customers price signals that encourage increased energy efficiency. The options range from offering time-of-use rates to a wider range of customers to charge higher prices for peak period usage, to adoption of block rate designs that charge higher rates for monthly usage levels beyond a minimum threshold block. The former requires new metering technology. The latter does not. Both should be reviewed for adoption.
Additional state appliance standards - Over the past three years, six northeast states have adopted state appliance standards that will provide significant long-term savings. Several of these standards have since been adopted as federal standards (largely as a response to state actions to set standards). Additional such opportunities exist. We encourage northeast states to take further action in 2006.
Against the backdrop of the difficult winter facing us, Maine Gov. John Baldacci, in his capacity as chairman of the Coalition of Northeastern Governors, on October 13 sent a letter to his fellow governors urging them to join in a coordinated policy effort to reduce natural gas demand over the next five years, and thereby reduce the region's electrical load as well. In his proposed Memorandum of Understanding, Gov. Baldacci noted, "Conservation and energy efficiency are the only short-term options to ease the strain on heating fuel and electricity markets and are easily implemented at the state and regional levels." In this time of volatility and vulnerability, NEEP couldn't agree more.
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