Many states throughout the country have Energy Efficiency Resource Standards (EERS), which require a certain percentage of electricity demand to be met by energy efficiency resources rather than generation. It is the EERS that forces utilities to fund and administer energy efficiency programs that deliver energy (and cost) savings to customers rather than sell them more electricity.

In some places around the country, utilities are beginning to push back on these standards.  In New Mexico, a state utility commissioner was leading a legislative effort to reduce the standard, thereby cutting back efficiency investment.  AEE’s partner, the New Mexico Green Chamber of Commerce, working with the Southwest Energy Efficiency Project, negotiated a compromise that should actually expand the energy efficiency offerings to New Mexico businesses and consumers.

The bill that passed the New Mexico legislature will lower the standard for 2020 from 10% to 8% but change the “cost effectiveness” test for efficiency resources from Total Resource Cost to Utility Cost.

State utility commissions use cost-effectiveness tests to judge whether a particular energy efficiency measure qualifies as an allowable use of ratepayer funds. The cost-effectiveness test thus determines whether certain technologies or programs are in or out of a utility’s energy efficiency offerings – and which test is utilized can make a difference.

A Total Resource Cost Test weighs the entire cost of an efficiency measure against the benefits to the utility, even if most of the costs are paid by the consumer.  Sometimes this total cost is considered against a variety of benefits, including comfort, health, and avoided generation, but not always. 

In contrast, a Utility Cost Test only considers the costs to the utility of a particular measure, taking the customer cost out of the equation. This makes sense, since only the utility costs – that is, rebates and other incentives for customers to make the investments – are paid for by ratepayer dollars. Cadmus did an excellent study comparing the two tests and concluded that Utility Cost is a much truer calculation of cost benefit in energy efficiency programs.

By moving to a Utility Cost Test, as New Mexico is doing, efficiency measures can qualify for utility programs that might otherwise be excluded, depending on the level of customer participation. It also means that utility efficiency programs can manage incentive levels so that they are high enough to move the market but not so high as to disqualify the measures from ratepayer support.

You can hear AEE’s podcast on Total Resource versus Utility Cost tests and the New Mexico legislation at www.policypodcast.com.