Across the U.S., governments at all levels are prioritizing climate action and setting intense carbon-reduction goals. New York and Pennsylvania, along with 24 other states, have joined the U.S. Climate Alliance, which pledges to reduce greenhouse gas (GHG) emissions by at least 26 percent by 2025 — a steep goal now only five years away.
The electric power industry is a long-standing partner in this push toward a clean energy future, as demonstrated by its significant CO2 emissions reductions. In fact, carbon emissions in the U.S. power sector were 33 percent below 2005 levels at the end of 2019, and a number of the nation’s largest utilities have committed to 80 percent or greater reductions by 2050.
But successfully achieving these deep carbon reductions will require further reductions in energy use as well as the replacement of existing fossil generation with zero-carbon technologies. There is still a way to go to slice energy usage in half.
Over the last 40 years, utility-run energy efficiency (EE) programs have generated massive energy savings of 211 billion kilowatt-hours annually. Energy companies across the U.S. invested more than $7.23 billion into these programs in 2018 alone. However, despite the well-established success of today’s EE programs, the ability of the current approach to energy efficiency to achieve significantly greater savings is limited, which has sparked an interest in what are called "smart energy programs."
By shifting current policies and fundamental program designs, next-generation EE programs can be a crucial tool for meeting deep carbon-reduction goals and increased electrification.
Evolving challenges
While most electricity companies have implemented energy efficiency programs in some form, many still face regulatory regimes that aren’t entirely supportive of significant customer investment in such programs. Today, 34 states provide adjustments to compensate for lost sales and 29 states provide performance incentives.
Still, a number of states retain regulatory constructs that aren’t set up to overcome the natural disincentive for electric companies to promote customers using less energy. Ultimately, our need to reduce carbon and our evolving grid architecture requires new EE policy frameworks — particularly in places where electric companies are prohibited from promoting them.
As for the programs themselves, most EE initiatives today promote customer adoption of more efficient devices, including smart light bulbs and thermostats, by providing incentives for customers to install them. Generally, programs are developed with an acute focus on customer and technology eligibility, as well as the delivery process itself.
However, there are indicators that this traditional approach to program design, delivery and evaluation is quickly becoming outdated and is ripe for innovation. For a majority of EE programs, savings are primarily grounded in rebate-driven commercial and residential lighting programs. But recent increases in federal lighting efficiency standards limit the overall savings that utilities can reap from these programs.
Further, the cost per kilowatt-hour saved has been increasing over the years, particularly for electric companies with extensive program histories. Customer-acquisition costs are rising as the customer segments most likely to participate are tapped, and recruiting less receptive customers requires increased incentives and marketing.
Finally, programs today are designed to minimize the risk of not delivering target energy savings. This prioritizes designs that support straightforward measurement and verification of the program's savings and undervalues the innovation that could yield the next deep vein of efficiency savings.
To address these challenges, a variety of policy, design, implementation and evaluation changes can be made to strengthen the foundation of these programs and aid carbon reductions. Fortunately, fresh approaches across the country provide an early guide.
Key policy adaptations
It’s crucial that policymakers provide clear objectives when undertaking any new program. This includes focusing on core objectives, rather than attaching a wide variety of objectives that may be misaligned, creating risk and uncertainty. It’s also important to correlate programs aimed at reducing energy use with existing and forthcoming carbon-reduction goals, which often promote increased electrification — a step that can increase electricity usage as it replaces fossil fuels.
The Sacramento Municipal Utility District provides a strong example of how the conflict between saving energy and increasing electrification can be resolved. Specifically, SMUD set a carbon standard, redefining the objective of its EE programs from reducing electricity use to reducing carbon emissions. Its goal was clear, consistent and focused.
Clear policy objectives should also be well aligned with the regulatory environment. Public utilities are just that: public. Thus, electric companies have never been solely focused on generating and selling electricity. They are servants to the needs of the communities they serve. But because many generate core revenue through customer demand and energy use, other objectives are often treated as necessary for compliance, rather than as opportunities for increased innovation. With states increasingly assigning energy and carbon management as core utility responsibilities, revenue generation also needs to shift from commodity sales to network and energy management.
Shifting from energy efficiency to smart energy programs
The traditional EE program model is growing outdated. Effectively addressing these challenges and achieving carbon reductions requires electric companies to rethink program design, delivery and evaluation. Instead of continuing down the path of a technology-replacement-based design philosophy, companies can prioritize an approach that is more attuned to how customers are using that technology.
The increasingly powerful data analytics and inexpensive measurement devices that are now available offer a path to a better understanding of how customers make energy-use decisions. This compels a different approach to program design through smart energy programs.
Smart energy programs have the following characteristics:
- Data-driven insights. Granular customer insights gathered by advanced technology can reveal opportunities for further use reduction. Data can be paired with propensity models to more effectively identify the most valuable or likely customers.
- Personalized offerings. Insights can also aid electric companies in delivering actionable, tailored information to individual customers through preferred channels.
- Evaluation, measurement and verification 2.0. New, sophisticated analytics can significantly improve program evaluation. Statistical techniques such as randomized control trials have boosted confidence in savings achieved outside the traditional measurement of specific technology replacements. These techniques allow electric companies to shift the focus of EM&V from the behavior of individual customers to the aggregate behavior of groups of participants. Further, analytical platforms that support robust program evaluation also can deliver program managers accurate, near-real-time results.
- Pay-for-performance. Smart energy programs include pay-for-performance programs. These reward customers not for taking specific prescribed or allowed actions but for achieving specific policy objectives (i.e., reducing GHG emissions). These programs simplify program logic models as the program administrator no longer decides which technology will be promoted through which channels, leaving those choices to customers and the market.
- Energy orchestration. Today, we’re able to entirely manage our energy usage alongside more cost-efficient digital sensing and control technology. Smart thermostats and building energy management systems give customers and electric companies the ability to automatically and almost instantaneously adjust energy in response to system conditions.
Transitioning away from traditional EE program design, delivery and evaluation and prioritizing smart energy programs allows forward-thinking energy companies to overcome growing challenges and enhance energy savings. By taking advantage of the variety of technologies available today, rethinking evaluation and adjusting policy framework, EE programs can become a core tool for deep carbon reduction.
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Val Jensen is a senior fellow at ICF focusing on critical issues facing utilities, including building operational resilience, better managing EE and DER programs and improving customer engagement.