Brendan Haley, a Banting post-doctoral fellow at Canada’s Dalhousie University’s School for Resource and Environmental Studies answers an important question in an article on Policy Options website: What are the lessons from utilities’ energy efficiency programs for spending carbon pricing revenues and building low-carbon transition organizations? Do you agree with those lessons?
Using carbon pricing revenues effectively
What are the lessons from utilities’ energy efficiency programs for spending carbon pricing revenues and building low-carbon transition organizations?
Federal plans require all Canadian provinces to have a carbon pricing regime by 2018 (through either cap-and-trade or a carbon tax). This means provinces will have access to carbon pricing revenues, and many provinces will create new administrative structures to use these revenues to support GHG reduction programs in areas like home retrofits and sustainable transportation. Some of the provinces with a jump start on carbon pricing have recently created new entities that can be described as low-carbon transition organizations: for instance, the Green Ontario Fund, Transition énergétique Québec, Energy Efficiency Alberta and Emissions Reduction Alberta.
The programs these new organizations will administer are quite similar to utilities’ demand-side management (DSM) initiatives that have operated in North America for several decades. Right now, in most provinces you can get help from your local utility (or “energy efficiency utility” in Nova Scotia) to retrofit your house, purchase energy-efficient light bulbs or optimize industrial energy systems. These programs are funded through electricity or natural gas utility rates and overseen by the regulatory commissions that govern public utilities.
The history of DSM could teach us some important lessons as we potentially enter a new paradigm of clean-energy program delivery. The big difference with DSM is that the regulators of public utilities do not order energy efficiency investments principally because they are good for the environment. The core rationale for demand-side management is that spending money on programs to save energy costs way less than spending to produce that energy by building power plants and transmission lines and burning fuel. A 2014 report by the American Council for an Energy-Efficient Economy found that it cost 2.8 cents/kWh on average to save a kilowatt hour, which is cheaper than traditional electricity sources (see figure 1).
The rules that govern energy efficiency in utility systems have both strengths and limitations. Let’s first consider the strengths.
Demand-side management strengths
Political independence. For energy efficiency programs to operate effectively, they need a consistent budget so that contractors, consumers and administrators can gain some momentum and start learning. There also has to be flexibility to adapt to changes in markets and technologies. This mix of consistency and flexibility can be hampered by political leaders exerting excessive control over programs or by sudden shifts in budgets.
DSM programs are relatively insulated from political interference because the funds flow through utility rates and are thus not part of general government revenues. The energy system cost-reducing rationale for DSM is also relatively clear and well accepted, which means efficiency programs are not as easily disrupted by shorter-term political priorities.
Evidence-based budgets and targets. The guiding principle in utility systems is that energy efficiency should be supported if it is more cost-effective than energy supply. There are a host of methodologies such as efficiency-potential studies, integrated resource plans and cost-effectiveness tests that help answer the question “How much economically viable efficiency is out there?” However, there are very few jurisdictions (especially in Canada) that have ever exploited energy efficiency up to its cost-effective potential. Nevertheless, some of the largest efficiency investments are made because they are justified by evidence-based processes sponsored by utility regulatory commissions.
Accountability for results. For energy efficiency to be recognized as a utility system resource, energy savings need to be measured and verified. Standard methodologies and a significant amount of effort go into the evaluation, measurement and verification of DSM programs. Government-run efficiency programs are not typically evaluated with the same rigour.
Demand-side management limitations
While the DSM policy framework has significant strengths, there are also limitations that are especially relevant when we consider what comprehensive, sustainable energy programs could look like when the primary goal is transitioning to a low-carbon economy.
Integration across sectors. The regulatory structures that support DSM are divided up by fuel types (such as electricity and natural gas), while other fuels, such as heating oil and transport fuels, are not delivered by public utilities. Thus there can be “fuel silos,” leading to efficiency service gaps. For example, some programs might aggressively support electricity conservation but not support insulation costs for consumers who heat with fuel oil. Programs with climate policy objectives could become “fuel blind” and support substitution toward cleaner fuels.
Longer-term outlook. There are strategies that aim to create longer-term structural changes toward promoting greener and more efficient supply chains. These “market transformation” programs do things like educate building tradespeople, pilot new technologies and promote energy efficiency labelling. They typically lead to improvements in codes and standards.
Although we have lots of experience with these programs, they can be difficult to justify within DSM plans because they are harder to measure and “hitting the targets” might take priority over longer-term transformation. A more climate-oriented energy efficiency mission would place greater priority on making structural changes to hit mid-century emissions reduction objectives.
Mission alignment. It can be awkward for regulatory commissions to order utilities to promote selling less of their product (for example, fewer kilowatt hours or cubic metres of natural gas). To be clear, the highest energy savings in North America are being achieved by utility administrators, and there are regulatory changes that can motivate utilities to aggressively pursue energy efficiency. Yet sometimes utilities or their regulators have trouble fully internalizing an energy savings mission. There is potential for low-carbon transition organizations to have a clear GHG reduction mission, which could lead to innovative cross-cutting programs and ambitious targets: for instance, making every new house so efficient that it can easily produce as much energy as it consumes.
How should we design and operate low-carbon transition organizations?
A key question for the new energy transition organizations that will invest carbon pricing revenues is whether they can emulate the strengths of demand-side management and overcome the limitations.
There are reasons why this could be a struggle. Given the lack of political consensus over carbon pricing, governments have a real interest in seeing the benefits from spending carbon pricing revenues flow to citizens. It is great to have a political champion, but these pressures could also result in too much political direction of program priorities and to underinvestment in planning, evaluation and monitoring, which will hinder long-term political legitimacy and sustainability. Carbon revenues might also restructure DSM programs in ways that decrease the strengths noted above: for instance, if carbon revenue funding starts to act as a substitute for DSM funding.
The leaders of low-carbon transition organizations and the political leaders setting up the policy frameworks within which they will operate need to get this right. Here are some ideas to consider.
First, jurisdictions just getting started might consider how existing DSM programs can be augmented or consider sustainable energy utility models run by third parties. Jurisdictions that have chosen government administrators should learn from agencies with a high level of functional independence and high performance. The New York State Energy Research and Development Authority is a high-performing DSM administrator. The Defense Advanced Research Projects Agency in the US is consistently celebrated for its innovation policy. Both organizations have government links that enable them to use multiple public policy tools, yet they are not hampered by short-term political considerations because governments respect their level of expertise, integrity and professionalism. Policy-makers should aim to build low-carbon transition organizations focused on taking an approach to energy demand that is just as sophisticated (if not more so) as the experts who build energy supply systems, such as power plants and transmission grids. This sophistication should lead to greater independence and vice versa.
Second, we should be prepared to undertake significant innovations in energy system planning as well as in evaluation, measurement and verification. This would include developing new energy system models to identify cost-effective emissions reduction pathways, tracking energy savings and finding indicators for structural changes in markets and technology. Carbon pricing revenue allocation decisions should be evidence-based, transparent and politically legitimate, and there should be assurance that programs are performing well.
Third, the multiple benefits of energy efficiency should lead to greater political resilience rather than greater vulnerability. The value of energy efficiency is supported by numerous policy rationales. For regulators, it is a cost-effective way to manage utility systems; for environment ministries, it can help meet GHG reduction targets; for social service departments, it can reduce energy poverty; for economic development divisions, it can improve worker productivity and industrial competitiveness; for health care managers, it can lead to lower costs and healthier buildings.
The creation of low-carbon transition organizations may produce a desire to streamline programs under a central organization, with a sole funding source and a single policy rationale. An alternative approach would be to support energy efficiency through multiple funding sources, attached to different policy objectives, while still creating streamlined program delivery to citizens. The latter approach could ensure that efficiency services are still provided when one policy rationale for efficiency loses favour but another maintains support. This would be a more complex public administration challenge, but it could ultimately lead to more stable and effective sustainable energy services to citizens.
To make sure the multiple policy rationales for energy efficiency complement one another, the development of low-carbon transition programs should also spur renewed interest in recognizing energy efficiency as a cost-effective resource in utility systems. Currently, no Canadian jurisdiction is exploiting the cost-effective potential for energy efficiency to the extent that leading American states are. If the existing demand-side management programs were able to make their full contribution, we could leverage the strengths of these programs, and then rely on low-carbon transition policies and programs to overcome remaining limitations.
As we embark on a new paradigm of low-carbon transition program delivery, we need to fully appreciate the benefits of what already exists, the limitations that need to be overcome and the complexity of the management challenge ahead.