Energy Efficiency’s Role in Greenhouse Gas Policies

1. Energy Efficiency’s Role in Greenhouse Gas Policies Kathleen Hogan Director Climate Protection Partnerships Division U.S. Environmental Protection Agency National Association of Regulatory Utility Commissioners February 19, 2008 Washington, DC

2. Overview • Many states focused on GHG reductions/policies • EE consistently identified as a key low-cost GHG reduction strategy at state and national levels • Reduce GHG emissions at lower overall cost • Specific EE policies are necessary to capture low cost EE • Price signals from GHG policies are not sufficient to realize cost-effective EE potential • E.g., price increases under proposed “cap and trade” or carbon tax approaches would only begin to tap this potential. • Known market barriers remain and must be addressed to realize this potential. • National Action Plan for Energy Efficiency • Role in addressing barriers • Key New/Ongoing Efforts

3. Greenhouse Gas Reduction Efforts at State Level • 25+ states with broad-based Climate Action Plans • 22 states committed to GHG reductions thru “cap and trade” or other market-based approaches • 17 states have announced GHG reduction targets

4. 25+ States with Completed Climate Action Plans Source: Pew Center

5. 22 States Committed to Regional Carbon Markets (w/ an additional 8 “observing”) Source: Pew Center

6. Regional Carbon Markets • Regional Greenhouse Gas Initiative (RGGI) • Created December 2005 • “Cap and trade” on CO2 from power plants beginning in 2009 • Western Climate Initiative • Initiated February 2007 • “by August 2008, a market-based system – such as a cap-and-trade program covering multiple economic sectors – to aid in meeting” GHG reduction targets. • Midwestern GHG Reduction Accord • Committed to “develop a market-based and multi-sector cap-and-trade mechanism” to achieve GHG reductions • Full implementation within 30 months of November 2007 signing

7. 17 States with GHG Reduction Targets Source: Pew Center

8. EE is a Key Low-cost GHG Reduction Strategy • U.S./International Scale Analysis • McKinsey • EPRI PRISM • IPCC • State Examples • 13 states with EE Resource Standards • Most tied to GHG reduction strategies • Variety of EE strategies play leading role in each of the 25 Climate Action Plans including • Lead by Example approaches for government facilities • Utility programs and policies • EE program funding • RGGI • 25% minimum “Public Benefits Allowance Allocation” • Most states have chosen to exceed

9. McKinsey, December 2007U.S. GHG Abatement Mapping Initiative

10. McKinsey, December 2007 (cont’d) • U.S. could reduce GHG emissons in 2030 by 3.0 to 4.5 gigatons of CO2e using tested approaches and emerging technologies. • Executive Summary: • “These reductions would involve pursuing a wide array of abatement options available at marginal costs less than $50 per ton, with average net cost to the economy being far lower if the nation can capture sizable gains from energy efficiency.” • “Unlocking negative cost options would require overcoming persistent barriers to market efficiency, such as mismatches between who pays the cost of an option and who gains the benefit (e.g., the homebuilder versus homeowner), lack of information about the impact of individual decisions, and the consumer desire for rapid payback …”

11. EPRI’s PRISM Analysis

12. Intergovernmental Panel on Climate Change (IPCC), 4th Assessment Report (AR) • There is a significant economic potential for the mitigation of greenhouse gas emissions from all sectors over the coming decades, sufficient to offset growth of global emissions. • “substantial reductions in CO2 emissions from energy use in buildings can be achieved using mature technologies for energy efficiency (high agreement, much evidence). • “survey of literature indicates that there is a global potential to reduce approximately 29% of the projected baseline emissions by 2020 cost-effectively [negative cost] in the residential and commercial sectors (high agreement, much evidence).”

13. IPCC AR 4: EE Is A Critical Component of GHG Abatement Portfolio • The range of stabilization levels can be achieved by deployment of a portfolio of technologies that are currently available and those that are expected to be commercialised in coming decades. • This assumes that appropriate and effective incentives are in place for development, acquisition, deployment and diffusion of technologies and for addressing related barriers

14. Price Signals Insufficient to Realize All Cost-effective Energy Efficiency • Energy efficiency faces known, persistent market barriers • Landlord – tenant problem • Builder – buyer problem • Poor/inadequate information • Lack of capital • Price increases resulting from mandatory carbon reduction policies (e.g., cap and trade on power sector or carbon tax) will not address EE market barriers. • Energy demand is relatively price inelastic • Complimentary policies to address these barriers are important to control costs of meeting GHG reduction objectives. • Many of the policies at the state and local level

15. National Action Plan for Energy EfficiencyAddresses Utility Barriers • National Action Plan for Energy Efficiency • Recommendations • Recognize energy efficiency as a high-priority energy resource. • Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource. • Broadly communicate the benefits of and opportunities for energy efficiency. • Provide sufficient, timely and stable program funding to deliver energy efficiency where cost-effective. • Modify policies to align utility incentives with the delivery of cost-effective energy efficiency and modify ratemaking practices to promote energy efficiency investments. • Released on July 31, 2006 at the National Association of Regulatory Utility Commissioners meeting • Goal:To create a sustainable, aggressive national commitment to energy efficiency through gas and electric utilities, utility regulators, and partner organizations • 60 member public-private Leadership Group developed five recommendations and commits to take action • Commitments to energy efficiency by 120 organizations • Released its Vision for 2025 in November 2007

16. Vision for 2025 • Released November 12, 2007 • Long-term Aspirational Goal • To achieve all cost-effective energy efficiency by the year 2025 • Equivalent to more than 50% of expected growth over next twenty years • Framework for implementing Action Plan recommendations • Puts the 5 recommendations into Action • Is a living document; open to new ideas; will be refined • Is a plan – need to know where you want to go in order to get there • A challenge for new thinking • 10 Implementation Goals • Action needed over next 10-15 years to lay policy foundation by 2025 • Highlights need for new technology • Offers initial approach to measure progress • Currently being refined by Leadership Group • Not a mandate; respects state processes – not one size fits all

17. Vision’s 10 Implementation Goals • Establishing Cost-Effective Energy Efficiency as a High-Priority Resource • Developing Processes to Align Utilities Incentives Equally for Efficiency & Supply Resources • Establishing Cost-Effectiveness Tests • Establishing Evaluation, Measurement, and Verification Mechanisms • Establishing Effective Energy Efficiency Delivery Mechanisms • Developing State Policies to Ensure Robust Energy Efficiency Practices • Aligning Customer Pricing and Incentives to Investment in Efficiency • Establishing State of the Art Billing Systems • Implementing State of the Art Efficiency Information Sharing and Delivery Systems • Implementing Advanced Technologies

18. Key New/Ongoing Efforts • National Action Plan for Energy Efficiency considering issue paper in this area for 2008 • Energy Modeling Forum (EMF) has committed to a new study (EMF-25) addressing “energy demand and efficiency in a growing economy” and notes the potential for EE to contribute to reduced carbon intensity. • States continue to evaluate and implement options to leverage energy efficiency within GHG reduction strategies