In This Issue
Energy Efficiency
June 1, 2009 Volume 39 Issue 2
Summer 2009 Bridge V-39-2 Energy Efficiency

Coming of Age in New York: The Maturation of Energy Efficiency as a Resource

Friday, June 19, 2009

Author: Paul A. DeCotis

New York’s effective energy-efficiency policies respond to changes in the marketplace and changes in technology.

The energy-efficiency industry is maturing. Firms that provide energy-efficiency products and services are becoming more common, and their business models require less government support to be profitable, and reductions in energy use brought about by improvements in energy efficiency are now widely recognized as real and measurable.

As a result, these reductions have become an energy resource that can be valued as a commodity, much like a unit of energy. This has allowed markets to value, and in some instances trade, reductions in energy use as an asset. New York’s leadership and support for the development of technologies and services to improve energy efficiency date back to the 1970s. Today, four decades later, the energy-efficiency industry has come of age.

When deciding whether to purchase a unit of electricity or to invest in energy efficiency, consumers usually respond by purchasing the unit of electricity. Often, they are not even aware that they are making such a decision—they simply turn on the lights or set their thermostats. Lack of information is one reason consumers are prevented from making informed, rational decisions about energy use.

Consumers are often unaware of the economics of saving a unit of electricity and the associated economic and environmental benefits. The commodity cost of electricity in New York averages 8.2 cents per kilowatt-hour (kWh), while reducing one kilowatt-hour of electricity use costs 3.9 cents (Figure 1). Even consumers who are aware of the economics, however, may not take action to improve energy efficiency because of the intangible costs of efficiency measures, such as the time required and the perceived nuisance of the effort to change.

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Figure 1   Energy-efficiency costs vs. generation. Source: NYSERDA.

New York, like many other states and electric utilities, not only offers technical assistance, information, and financial incentives to consumers, but also keeps abreast of behavioral research as a basis for developing and implementing effective programs that encourage consumers to choose the investment in energy efficiency rather than purchasing the kilowatt-hour of electricity.

Government and utility intervention in markets has helped overcome many of the barriers preventing the widespread adoption and use of technologies that reduce electricity use and electricity demand. This is New York’s story.

New York’s Story

Since the late 1970s, New York has supported public and private investment in technologies and services to improve energy efficiency in all economic sectors. Significant inroads have been made, and these sectors now have technologies and processes that have improved energy efficiency. Policy makers and businesses have learned that reducing energy use is critical for reducing costs, stimulating economic growth, and postponing the need to build new and more costly power-generating facilities.

New York’s energy-efficiency efforts include collecting a system-benefits charge (SBC) for supporting private investments in improvements in energy efficiency, continual updating of building-energy codes and appliance standards, and promulgating government directives that require state agencies to improve energy efficiency. New York also has a history of investing in research and development (R&D) programs that lead to the development, demonstration, and deployment of new technologies and industrial processes and ultimately to improvements in energy productivity. Working closely with utilities, the state energy authorities, including the New York State Energy Research and Development Authority, Power Authority of the State of New York, and Long Island Power Authority, have some of the most effective programs in the country for creating public-private partnerships to help consumers chose investments in energy efficiency over increased electricity use.

Although the past three decades have been characterized by growing population and greater demands for energy-using technologies to support rising lifestyle expectations, energy use per capita in New York has remained relatively flat—about one-third lower than the national average. New York’s relatively low energy use per capita is due in part to its highly energy-efficient urban transportation system, which includes subways, commuter rail, buses, and ferries. It is also partly attributable to structural economic changes, such as a shift away from heavy industry toward a service and information-based economy.

Over the last five decades, as the value of financial and related services has increased as a share of gross state product (GSP), the share of industrial output has decreased. Despite the shift, however, industrial output increased an average of 2 percent annually; at the same time, overall energy use fell by 40 percent, and electricity use in the industrial sector remained flat. Thus, as industrial activity fell as a share of GSP, the industrial sector also became significantly less energy intensive and less electricity intensive, due in part to improved end-use energy efficiency.

Isolating precisely how much of the improvement in energy productivity is attributable to improved efficiency, as compared to the loss of energy-intensive industry in the state, is difficult because such data are not readily available. Nonetheless, a compelling case has been made that improved energy productivity is a significant contributing factor.

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Figure 2   Per capita electricity use. Source: NYSERDA.

New York’s electricity use per capita relative to use elsewhere in the United States provides an indicator of the overall success of New York’s continuing efforts to promote the efficient use of electricity (Figure 2). Since 1960, New York’s electricity use per capita has increased at a substantially lower rate than in the United States as a whole; the difference has increased from about 1,100 kWh to about 4,900 kWh. Note that California has also made impressive gains.

Table 1 shows the difference in electricity use per capita in New York and the country as a whole by major economic sectors. Residential use accounts for 41 percent of the difference; the industrial sector accounts for 53 percent of the difference. The commercial and transportation sectors account for the remaining 6 percent.

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New York focused its efforts on end-use consumers to identify opportunities for energy savings and promote permanent changes in consumer behavior. Efforts targeting upstream market participants, including distributors, contractors, trade associations, and manufacturers, successfully induced structural changes that resulted in the accelerated adoption of energy-efficient technologies and practices. Because markets and consumer behaviors changed and government intervention was no longer necessary, several government-supported programs were discontinued. For example, once energy-efficient room air-conditioners had made significant inroads in stocking patterns by participating retailers and consumers were buying them at rates never seen before, financial incentives were reduced and ultimately eliminated—with little effect on stocking or purchasing behaviors.

Transitional Years

In the late 1970s, with federal funding provided through the newly created U.S. Department of Energy State Energy Conservation Program (SECP), New York launched its first efforts directed toward improving energy efficiency and reducing the demand for electricity. Funding was limited, but the effort represented an important first step in focusing attention on the need for and benefits available from improving energy productivity. Over the years, the state was able to develop a portfolio of programs to address energy use in the residential, commercial, industrial, and institutional sectors.

The programs took another step forward in the 1980s when Congress appropriated funding to the states from a legal settlement against oil companies for charging excessive prices for crude oil in the late 1970s. By 1989, New York had received more than $335 million, including interest, from this funding source.

In 1984 New York’s energy-efficiency efforts began in earnest, driven by construction delays and concerns about the completion of several large power plants. The state was convinced that reductions in demand were potential alternatives to continued investment in expensive power-generation projects. Utilities developed pilot demand-reduction programs funded at approximately $25 million annually statewide, representing approximately .0025 percent of gross annual utility revenues.

In 1987, New York concluded that demand-reduction programs were viable economic alternatives to new supplies of electricity and that they should be considered on an equal footing with supply in integrated resource planning. In the early 1990s, the state implemented a regulatory scheme that severed the relationship between electricity sales and revenues. Under this scheme, utilities would be made whole and all costs associated with their business would be covered, regardless of sales.

Along with this revenue-decoupling mechanism, the state approved financial incentives for achieving energy-efficiency goals, as well as financial penalties for falling short of those goals. The incentive scheme proved to be effective and was successfully adapted to each investor-owned utility.

By 1993, spending on reductions in demand and energy efficiency had reached $280 million. Additional spending by state energy authorities raised the annual investment in energy-efficiency resources to about $330 million.

In 1996, following a national trend, New York began the process of restructuring its electricity system to increase competition and reduce prices by requiring utilities to sell their power plants to independent power producers, thus creating a wholesale market for the buying and selling of electricity. Investor-owned utilities became transmission and distribution companies, and the responsibilities for administering energy-efficiency and demand-reduction programs were transferred to the New York State Energy Research and Development Authority (NYSERDA).

The role of utilities, following divestiture of generation assets, was to collect funds from ratepayers through an SBC to be used for administering energy-efficiency, demand-management, environmental-protection, and R&D programs. Since 1998, NYSERDA has been administering statewide programs funded by SBCs in cooperation with the Power Authority of the State of New York and the Long Island Power Authority.

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Figure 3   Energy-efficiency investments and achievements. Source: NYSERDA.

In 2007, New York’s investment in energy efficiency alone, excluding investment in R&D and renewable energy, was approximately $300 million (Figure 3). The amount was increased to close to $700 million in 2009 as part of an ongoing effort to significantly expand energy-efficiency programs.1 Since 1990, New York has lowered its annual electricity use by nearly 12,000 gigawatt hours, or about 8 percent of end-use sales (Figure 4). The investment in energy efficiency and the savings achieved has created more than 18,000 net new jobs and reduced CO2 emissions by about 6.5 million tons per year—equivalent to removing about 1.3 million cars from the roads annually.

By design, resource-acquisition and market-transformation strategies have led to substantial benefits beyond measured energy savings and reductions in peak demand. The programs have created highly skilled jobs, changed consumer attitudes and behaviors, expanded retail product offerings, and reinforced existing public policies. These “market effects” are expected to persist beyond the life of particular energy-efficiency programs and to continue to affect market dynamics and decision making by consumers. Market effects can be measured by analyzing the difference between total energy-efficiency market share realized in the presence of a program and the market share that can be directly attributed to the specific efforts of that program, as shown in Figure 4.

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Figure 4   Market effects. Source: NYSERDA.

Through the end of 2007, the benefit-cost ratio, counting only direct utility-system benefits for New York’s portfolio of SBC-funded energy-efficiency programs, is 6.2 (on a present value basis). Including non-energy benefits, such as improved comfort, safety, and productivity, the benefit-cost ratio increases to 9.9, and adding macroeconomic benefits (e.g., valuing increased employment) increases the ratio to 13.2. In 2007 alone, customers realized net economic benefits of about $460 million as a result of SBC-funded efficiency programs implemented since late 1998.

Lessons Learned

Experience has demonstrated that well designed, well funded, and sustained public initiatives can result in substantial energy savings and that minimum efficiency standards can be a very effective strategy for stimulating improvements in energy efficiency on a large scale, especially if standards are updated periodically. Minimum efficiency standards have been a key element in both federal and state energy-efficiency efforts. To be effective, these standards must be technically and economically feasible and must provide enough lead time for manufacturers to phase out the production of non-qualifying products in an orderly way.

Government-funded R&D contributed to the commercialization of a number of important energy-efficiency technologies. Our experience has demonstrated that R&D can take many years to “pay off,” and that in developing R&D programs, attention should be paid not only to technological advancement, but also to commercialization and market development. Although some evidence suggests that energy prices influence energy efficiency and levels of energy use, neither the federal government nor the states have used energy taxes as a strategy for stimulating greater energy efficiency to any significant degree.

The support of government policy and financial incentives can lead to the adoption of energy-efficiency measures. Financial incentives should be carefully designed to avoid costly efforts that have little or no incremental impact in the marketplace. One way to avoid this outcome is to provide incentives for newly commercialized technologies, particularly those with high initial cost but good prospects for cost reduction as demand grows, production expands, and learning occurs.

Education, training, and the dissemination of information can increase public awareness of energy-efficiency measures and improve know-how in energy management. The Energy Star labeling program exemplifies the impact of a well conceived, widely promoted labeling and education effort. Education and training are also important for the successful implementation of building-energy codes.

Energy-efficiency policies should be kept in place for a decade or more to ensure the orderly development of energy-efficiency markets. At the same time, policies such as efficiency standards and targets, product labeling, and financial incentives should be revised periodically. This will increase their effectiveness and reduce program costs (e.g., phasing out incentives as particular technologies become well established in the marketplace). In our experience, dynamic policies have led to steady improvement in the efficiency of residential appliances, while stagnant policies failed to maintain efficiency improvements in cars and light trucks during the 1990s and early years of this decade.

Energy-efficiency policies and programs have focused primarily on increasing the energy efficiency of buildings, appliances, vehicles, and industrial operations. Less attention has been paid to changing consumer behavior (e.g., encouraging people to drive less or buy fewer/smaller vehicles, appliances, or homes), although studies have shown that behavior modification has the potential to save 2 to 5 percent, without much difficulty. It remains to be seen how large a role behavior-modification programs can play in improving energy efficiency in the coming decades.

What Lies Ahead

Building on New York’s history of investment in energy efficiency, in January 2009, Governor David A. Paterson announced a statewide “15 by 15” goal for New York, requiring that electricity use be reduced by 15 percent by 2015 (compared to what it would have been) and that 30 percent of the state’s electricity needs be met by renewable resources. To meet this ambitious goal, New York is considering significantly expanding yet again its energy-efficiency programs. Achieving the “15 by 15” goal will require that electricity growth be completely offset through 2015, and in fact be slightly reduced.

Projections are that about 20 percent of the efficiency goal (i.e., about 3 of the 15 percent target) can be achieved by current programs. On the order of 40 percent of the goal (i.e., 6 of the 15 percent target) can be achieved through updates to the Energy Conservation Construction Code and appliance-efficiency standards (with most of the savings from appliance standards). The remaining 40 percent of the goal is likely to be met through a portfolio of new initiatives, including targeted energy-efficiency programs, market transformation, peak-demand management, and R&D on the commercialization of emerging technologies. New York is now looking into how it might integrate behavioral-change messaging and practices into its energy-services offerings as a catalyst to increase the return on traditional programs.

New York’s successful energy-efficiency programs and initiatives have convinced many of the value of energy efficiency. These measures require no-risk investments by consumers who are slightly more proactive and willing to take steps to reduce their energy use and their carbon footprint. However, a new approach will be necessary for consumers who are content with the status quo, who have seen the facts and figures but are still resistant to change.

Government support of further growth in the energy-efficiency industry will be necessary until private investment in energy efficiency becomes second nature to everyone. Despite the increasing maturity of the energy-efficiency industry and the awareness that efficiency is a valued resource in energy-system planning, energy-efficiency policies will still be necessary to overcome market barriers. The key to their success is to design policies in a way that responds to changes in the marketplace as well as to changes in technology. These policies must include support for R&D to push the technological envelope, education for consumers through labeling, incentives for the most efficient products, and adjustments upward of minimum efficiency standards.

 Note: All references are from materials either initiated by or gathered by the author for the New York State Energy Research and Development Authority to support the development of the 2009 State Energy Plan. The plan will be released in final form in October 2009.

FOOTNOTES

 1            New York’s energy-efficiency programs are currently administered by the New York State Energy Research and Development Authority (NYSERDA), Long Island Power Authority (LIPA), and New York Power Authority (NYPA). To implement Governor Paterson’s “15 by 15” energy-efficiency goal, the Public Service Commission is expanding NYSERDA’s programs and reviewing new efficiency programs proposed by investor-owned utilities as part of its Energy Efficiency Portfolio Standard (EEPS) proceeding. Approved funding levels for efficiency programs as of this writing are: NYSERDA (System Benefits Charge): $175 million through 2011; LIPA: $924 million through 2019; NYPA (low-interest financing for energy services): up to $185 million per year; EEPS: $172 million per year through 2011. In addition to state-funded programs, the state Division of Housing and Community Renewal administers the Weatherization Assistance Program

About the Author:Paul A. DeCotis is deputy secretary for energy in the Office of the Governor, State of New York.