At the end of December, news outlets were reporting a startling development.  Energy use in US homes had fallen to 2001 levels. This reduction in energy demand happened while more of us are using computers as a part of our daily (i.e., non-business) lives and all sorts of electronic gadgets litter our homes.

There are many reasons for this. More laptops and fewer desktop models mean less energy demand even though we use computers more. Now tablets and phones are multiplying as well, but competing over weight, size and battery life – all of which means using energy more efficiently. LED backlighting has made many flat-screen TVs – energy hogs when they were first introduced – more energy efficient than the old cathode ray tube models.

Also at play are state and federal standards and policies that have fundamentally changed the energy use landscape. Energy efficiency resource standards (EERS) are in place in 25 states around the country, requiring a reduction in energy demand growth by a certain percentage each year, with utilities funding programs to help residential consumers reduce energy use in order to meet those requirements. Many states have also offered additional incentives backed by federal stimulus funds.

Then there are standards for appliances and electric devices. Federal lighting standards have forced traditional incandescent bulbs to go the way of the dodo bird. With increasing performance requirements of lighting from 2012 to 2014, better efficiency was like gravity – not just a good idea, but the law.  

Building codes also drive improved energy performance. The International Energy Conservation Code (IECC) is updated every 3 years. Prior to the stimulus bill, many states had some sort of requirement that building codes include energy efficiency. But with the $3 billion doled out to states in 2009 through the American Recovery and Reinvestment Act came a requirement that states adopt the 2009 IECC.  As a result, 2009 IECC became the norm – and with it a plethora of energy conservation requirements.

Interestingly, all this progress towards greater energy efficiency creates issues for utilities.  First of all, utilities receive return on their investments through rates collected from consumers.  This simple formula works fine as demand is increasing, but in the face of declining or flat demand many utilities are now seeking a “decoupling” of sales of electricity from their revenues. This policy, long a staple of energy efficiency advocates, is being pursued by utilities like Xcel Energy in Minnesota and Colorado to mitigate the impact of reduction in revenues on returns to their investors.

Secondly, throughout the country, utilities have so far met their energy efficiency standards primarily – up to 70% – through lighting retrofits.  But with the change in federal standards, these measures no longer count – there’s no credit given for simply complying with the law.

Third, lower electric power rates due to low natural gas prices reduce the options available to many of the utilities for obtaining additional energy efficiency.  In states with an energy efficiency resource standard, any efficiency measures must meet a “cost-effectiveness” threshold in order to be available to utility customers. Low natural gas prices drive down this threshold, limiting the types of measures that qualify.

What’s worse, in most states, the formula for measuring cost-effectiveness qualifies efficiency measures only if they save money based on total cost, even if the customer assumes the bulk of that cost rather than ratepayers (the Total Resource Cost Test).  As a result, many innovative technologies never meet a qualification threshold for inclusion in a utility’s efficiency plan – even if they can deliver efficiency at a fraction of the cost of generation provided by utilities.

A report by Cadmus in August 2013 attempted to address these issues. Cadmus helps utilities around the country design energy efficiency programs to comply with respective state standards. They suggest that legislatures and program administrators can take a number of measures to address this challenge:

1. Expand utility offerings to include the latest technological developments, such as:
   1. LED Lighting
   2. Heat Pump Water Heaters
   3. Smart technologies and controls
   4. Ductless mini split HVAC systems
2. Consider alternative efficiency program designs:
   1. Offer “upstream” programs, which provide incentives to the purveyors of products to market the products and reduce the price on the shelf.  This eliminates much of the overhead expense associated with managing rebate programs.
   2. Use Point of Sale technology to provide “instant rebates” to customers at the store.
   3. Offsite residential energy audits, providing online resources to evaluate home energy use, identify upgrades and connect with resources to provide the service.
   4. Residential Energy Service Contracting, financing improvements in energy efficiency through future savings to the customer, as is now done by Energy Service Companies (ESCOs) for commercial customers.
3. Support improved building codes and standards – providing jurisdictions with assistance to go above and beyond current legal minimum standards to improve building performance.  The California PUC has adopted a model set of rules for applying these credits for utility programs.
4. Behavioral efficiency programs – Utilities can move away from the assumption that people only make decisions based on an economic analysis and instead embrace the latest developments in behavioral program design to spur action and efficiency improvements from their customers.
5. Develop innovative financing mechanisms to assist consumers in purchasing decisions – credit enhancements, on-bill repayment systems and property assessed clean energy (PACE) financing are all innovative mechanisms to improve the flow of private capital and reduce up front barriers for consumers.  Combine these programs with a robust marketing effort to help drive demand.
6. Replace the “Total Resource Cost Test” (TRC) with a more appropriate measure of cost effectiveness such as a “Program Administrator Cost Test” (PAC), similar to the Utility Cost Test New Mexico switched to last year. The study quotes a recent comprehensive analysis of cost tests used by states: “The advantages of using the PAC test are many and obvious.  It reduces the uncertainties associated with estimating incremental measure costs, avoids the complexities of estimating potential non-energy benefits to participants and worrying about how to discount them; above all, it provides a more rational basis for designing programs and incentive structures that are more compatible with how utilities’ procure resources.”

While the challenges facing utilities in light of the changing landscape of energy are numerous, they are not insurmountable. As the Cadmus study identifies, many options exist for continued success in reducing consumer bills, increasing energy efficiency and spurring economic growth.