Energy Efficiency in Utilities

To meet electricity demand, as well as state energy or emissions reduction requirements, utilities can save a kilowatt-hour (kWh) through energy efficiency or generate a kWh. 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.

Utilities and other program administrators develop and implement a diverse portfolio of program types that target all customers and sectors using a variety of strategies. Each program type provides a unique level of savings at a specific cost, which can be quantified through several approaches, including the levelized total cost of saved electricity and levelized program administrator cost of saved electricity.

Lawrence Berkeley National Laboratory considered the levelized program administrator cost of saved electricity for a variety of utility customer-funded efficiency program types from 2009 to 2015, finding that costs ranged from residential lighting rebate programs ($0.011 cents/kWh) to whole-home retrofits ($0.069/kWh). In addition to specific programs, the report also provides market sector-wide estimates (i.e. savings-weighted average cost of saved electricity values), by quantifying savings-weighted averages across the residential ($0.021/kWh, excluding low-income consumers)1 and commercial, industrial, and agricultural sectors ($0.025/kWh).2

Electric and natural gas utilities, as the main providers of energy for households and businesses, invest significant resources in programs that boost energy efficiency. Since 2011, new investments in both electric and natural gas energy efficiency programs have increased by more than 25%, leading to an 18% increase in energy efficiency incremental savings in electricity and a 98% increase in incremental savings in natural gas. When compared to 2006, energy efficiency programs today are generating more than triple the incremental savings in electricity.3

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 2019, 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%).4

The strongest EERS requirements are in Massachusetts and Rhode Island, which require more than 2.5% new savings annually.5 Massachusetts and Rhode Island are also among the top 3 states for most utility investment in energy efficiency programs. 6

While different states have different efficiency opportunities depending on their climate, geography, and economy, there is a clear trend that states that incentivize 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, EERS states stand out: Vermont, Rhode Island, Massachusetts, Maryland, Illinois, Iowa, and Minnesota all dedicate significant investment to efficiency programs and experience significant savings.8 However, note that energy savings are self-reported and may not be comparable, and that some states include spending on efficiency of non-regulated fuels such as propane under electricity spending, but the fuel savings under natural gas.

Traditional utility regulation has tied (“coupled”) utility sales to profits: i.e., more sales results in more profits.9 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. All of the top 10 states for electricity savings 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.10

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.11 While one component of this system – smart meters – was uncommon before 2008, they have grown rapidly in the last decade, now surpassing 50% of the total installed stock of meters in 2017.

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 2017, industrial users were the primary demand response participants: although the industrial sector made up only 0.7% of demand response participants by number, it was responsible for 45% of peak demand savings in 2017. In contrast, the residential sector accounted for 88% of participants in demand response programs, and only 32% 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.12

While end-use is 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 2.6 trillion kWh in 2018, or 60% of U.S. power generation, and 27% of U.S. greenhouse gas emissions.13, 14 These plants have also made gains in thermal efficiency, as measured by their heat rate, which fell by 9% from 2002 to 2017.15 Improving the heat rate of a typical 500-MW unit by only 1% can amount to fuel savings16 of greater than $600,000 annually.17, 18

Transmission and distribution systems have also seen significant decreases in electricity losses.19 Losses, while not entirely avoidable, can be costly: in 2017, U.S. losses were estimated at 202.5 TWh, slightly more than the net generation in the state of California in 2018.20 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%).21