Energy Efficiency in Utilities

Energy efficiency allows utilities to meet state energy or emissions reduction requirements, as well as reliably meet its customers’ overall electricity demand. Thus, it is informative to consider energy efficiency as an energy resource: one that is distributed, zero-carbon, and often the most affordable option to satisfy energy needs relative to other generation technologies, even compared with wind and utility-scale solar.

Utilities and other program administrators develop and implement a diverse portfolio of programs that help different customers and sectors save energy using a variety of strategies. The cost-effectiveness of different programs can be quantified through several approaches, including by dividing the expenses by the number of kilowatt-hours saved for a levelized cost of saved electricity. The levelized costs shown above include only the program administrator costs, not any additional costs paid by customers.

Lawrence Berkeley National Laboratory considered the levelized program administrator cost of saved electricity for a variety of utility ratepayer-funded efficiency program types in 2018, finding that costs ranged from residential lighting rebate programs (1.2 cents/kWh) to HVAC retrofits (8.6 cents/kWh). 1

Electric and natural gas utilities, as the main providers of energy for households and businesses, invest significant resources in programs that boost energy efficiency. Though overall savings and spending have increased since 2011, investments in utility energy efficiency programs have plateaued since 2017.

In 2020, utility energy efficiency programs faced obstacles due to the pandemic. Despite these challenges, many utilities adapted by developing remote energy assessments and other virtual work. Though some utility energy efficiency programs have returned to full capacity since the beginning of the pandemic, the industry still faces systemic challenges. Savings opportunities from lighting, often the lowest cost measures, have been reduced as LED bulbs become the norm, meaning utilities face new challenges in continuing to grow cost-effective residential energy efficiency portfolios.

An energy efficiency resource standard (EERS) is a state-level energy efficiency mandate, similar to a renewable portfolio standard (RPS), that requires an electric and/or natural gas utility to achieve a targeted level of energy savings from energy efficiency measures. As of 2021, 26 states have EERS policies in place. In 2017, states with EERS saved on average more than four times as much electricity as those that did not have targets (1.3% of retail sales compared to 0.3%). 2

The strongest EERS requirements are in Massachusetts, which requires more than 2.5% new savings annually. 3 Massachusetts, Rhode Island, and Vermont make up the top three states for most utility investment in energy efficiency programs. 4

In recent years, some states have taken a few steps backward. In 2021, New Hampshire’s public utility commission removed the requirement for the state’s utilities to pursue all cost-effective energy efficiency, effectively removing the EERS. 5 In 2022, Arizona’s Corporation Commission rejected rules that would have extended the state’s EERS. The previous EERS was estimated to have saved ratepayers nearly $1.4 billion and help avoid the build out of gas combustion turbines. 6

While different states have different efficiency opportunities depending on their climate, geography, and economy, there is a clear trend that states incentivizing energy efficiency by EERS or other policies typically realize the greatest benefits from utility (ratepayer-funded) energy efficiency programs.7

Comparing each U.S. state’s annual per capita spending on efficiency programs (including residential, commercial, and industrial programs) and the per capita incremental energy efficiency savings provides a measure of each state’s utility efficiency program impact regardless of the state’s size.

On this basis, those with an EERS stand out. Maryland, Illinois, Massachusetts, Vermont, Michigan, and Minnesota, as well as Washington, D.C., all dedicate significant investment to efficiency programs and experience the highest per capita savings. However, note that energy savings are self-reported and may not be comparable. Some states also include spending on efficiency of non-regulated fuels such as propane under electricity spending, but include the fuel savings under natural gas.

Traditional utility regulation has tied (“coupled”) utility sales to profits: i.e., more sales results in more profits.8 This is a direct disincentive to energy efficiency, and it can be corrected with specific policies, such as Decoupling and the Lost Revenue Adjustment Mechanism (LRAM).

Performance incentives can complement those strategies by rewarding savings from energy efficiency programs. Of the top 10 states for electricity savings, nine deploy at least one of these strategies to incentivize energy efficiency – decoupling, LRAM, or performance incentives – and eight use performance incentives in concert with a decoupling or LRAM strategy. 9

Electricity generation presents varying costs, both financial and in terms of emissions, that depend on the time of day, weather, and other factors, such as a downed power plant or disrupted power lines. However, most consumers pay flat rates for electricity, insulating them from these challenges that result from high-demand periods and disincentivizing energy-efficient behaviors that could help stabilize the grid.

Grid modernization technologies that enhance the responsiveness of the grid and enable greater communication between consumers and utilities are evolving rapidly, and utilities are preparing for the increasing role that they may play in their operations. One such example is in advanced metering infrastructure (AMI).

Such technology is the foundation for a more responsive energy system, allowing customers to alter their energy use to reflect grid conditions, and generating data that would allow energy efficiency program implementers to better design energy efficiency programs including demand response, measurement and verification, and peak hour savings.10 While one component of this system – smart meters – was uncommon before 2008, they have grown rapidly in the last decade, now surpassing 60% of the total installed stock of meters in 2019.

Demand response is a tool that allows electricity demand to be more flexible, which enhances the energy efficiency and reliability of the grid, responds to unexpected shortages and periods of high peak demand, and supports the greater incorporation of intermittent renewables.

The main entities involved in demand response programs are utilities, end-users, and in many cases, load aggregators, which enable the bundling of demand response capabilities for wholesale and retail markets. In 2020, industrial users were the primary demand response participants. Although the industrial sector made up only 0.3% of demand response participants by number, it was responsible for 46% of peak demand savings in 2020. In contrast, the residential sector accounted for 96.8% of participants in demand response programs and only 34% of peak energy savings.

However, the potential for demand response is likely much higher. A recent study from the Brattle Group estimates that if real-time demand response programs and investments were scaled up significantly, they could potentially provide 200 GW of load flexibility and approximately 20% of forecasted U.S. peak load in 2030, saving more than $15 billion a year in avoided system costs. 11

While end uses are often the focus of energy efficiency programs, there are massive opportunities for greater energy efficiency in power generation, transmission, and distribution systems. Fossil-fuel power plants produced more than 1.5 trillion kWh in 2021, or 38% of U.S. power generation, and roughly 24% of U.S. greenhouse gas emissions.12, 13 These plants have also made gains in thermal efficiency, as measured by their heat rate, which fell by 14% from 2002 to 2021. 14 Improving the heat rate of a typical 500-MW unit by only 1% can amount to fuel savings 15 of greater than $600,000 annually. 16, 17

Until 2021, transmission and distribution systems had seen significant decreases in electricity losses. Losses, while not entirely avoidable, can be costly. In 2021, U.S. losses were estimated at 225 TWh, about one third of the net generation in the state of California in that same year.18 From 1990 through 2002, the U.S. experienced losses of roughly 7%. However, from 2002-2017, losses fell to roughly 5%. While the U.S. electric transmission and distribution system is now more efficient, some countries have achieved lower levels of losses, including Singapore (2%), Iceland (3%), South Korea (3%), and Germany (4%).19