In April 2015, the Bipartisan Policy Center’s (BPC) Energy Project released new economic modeling analysis of the proposed Clean Power Plan. The analysis explores a range of compliance choices that states could consider when developing implementation plans, such as state versus multi-state implementation and rate-based versus mass-based compliance. In addition, BPC explored how the availability of new end-use energy efficiency (EE) investments could influence the electricity sector’s response to the Clean Power Plan. The analysis highlights the importance of EE in both lowering compliance costs and safeguarding electric reliability.
End-Use Energy Efficiency
EE refers to a suite of measures—such as light-bulb replacement programs, insulation/weatherization, and efficient appliances—which can reduce the demand for electricity and mitigate the need to build new electric generating capacity. The proposed Clean Power Plan sets emission goals based, in part, on assumptions about the cost and availability of new EE. In addition, the proposal allows for the use of EE to help meet emission goals.
Many states currently have successful programs in place to encourage energy efficiency investments. There is ongoing debate about how much additional EE is available in each state at what cost. Multiple studies have suggested that it costs utilities about 2 cents/KWh to run EE programs. In typical utility-funded energy efficiency programs, roughly half of the total resource cost is borne by the utility and half by the consumer. In addition, there are other models in use to finance efficiency projects, as well as policies designed to better align incentives and remove investment barriers.
At 2 cents/KWh, EE is cost competitive with traditional generating resources. However, in many states, there does not appear to be full investment in cost-effective EE, and there is a wide range of theories about the investment barriers and misaligned incentives that have slowed deployment. For example, an owner of a rental property may purchase the air conditioning equipment for a unit but have a tenant pay the electricity bill. That owner may not want to invest in a more expensive energy efficient air conditioner if he wouldn’t benefit from the savings that accrue to the tenant.
The question now is, will the Clean Power Plan be a policy lever that unlocks investment in EE? And if so, to what extent?
BPC Modeling Assumptions
In a suite of modeling scenarios using ICF International’s Integrated Planning Model (IPM), BPC models compliance with the Clean Power Plan both with and without access to varying levels of new EE.1 In some scenarios, we allow the model to endogenously select to invest in new EE, based on simplifying assumptions about cost and availability. The available supply of energy efficiency is based on ¼ of the supply found in a recent Synapse study and was divided among a three-step supply curve. In 2020, costs paid by the utility ranged from 2.3 cents/KWh to 3.2 cents/KWh, with costs growing over time. Regional EE supply was apportioned based on electricity demand and energy efficiency projects were assumed to deliver energy savings over a 12-year lifespan.
In other scenarios, the supply assumption was varied, with some scenarios eliminating the option for additional EE investments altogether. This includes the reference case, where no additional EE was available beyond that included in the demand forecast. If additional efficiency investments were offered in the reference case, where there is no Clean Power Plan, the model would choose to invest in it. However, BPC elected to restrict investment in new EE for the reference case to better mirror the investment trends seen in the real world. In other words, BPC assumes that in response to the Clean Power Plan, states implement policies that help to “unlock” cost-effective EE investments.
Impact of EE on Clean Power Plan Compliance Costs & Coal Generation/Capacity
The availability of EE had a significant impact on projected compliance costs and on the generation and capacity mix. Allowing for EE investment lowered compliance costs throughout the suite of scenarios BPC ran, regardless of whether compliance was specified as state-only or multi-state, rate-based or mass-based. When EE investment was restricted, costs were up to 6.1% higher than the reference case in 2020 and 7.8% higher in 2030.2 When the model could endogenously select EE, compliance costs became negative because the energy efficiency investments more than paid for themselves over time. Among the suite of BPC modeling scenarios, total costs to deliver energy services dropped as low as 4% below reference case in 2020 and 5.2% below in 2030 due to the projected savings from implementing policies that incentivize additional cost-effective EE. It is important to note, however, that the model may not capture all costs. For example, the opportunity cost of the EE investment, or the return on alternative investments that a consumer could have made if they had not invested in EE, are not included. Additional attention to the representation of energy efficiency investments in power sector modeling would help states as they embark on planning for the Clean Power Plan as well as energy planning more broadly.
In the BPC analysis, allowing for investment in new EE reduced compliance costs in several ways. First, EE is cost competitive when compared to other supply-side investments modeled, including building new natural gas combined cycle units. As a result, at the cost and supply specified by BPC, all of the EE made available was selected by the model in every scenario that allowed EE investment. Second, investments in EE provided carbon-free demand reductions, which freed up space for more carbon-intensive, lower cost generation, such as coal. As a result, in runs with EE, there was more coal generation and capacity than in runs without EE. In scenarios without EE, compliance was driven by investment in gas generation and capacity. The greater gas demand under the no EE scenarios led to higher gas prices and increases in wholesale electricity prices. As compared to scenarios that allowed for investment in EE, gas prices were 8% to 10% higher and wholesale electricity prices were 6% to 12% higher in 2030 in the no EE runs.
By reducing peak demand, as well as allowing room for existing coal generation, state implementation policies that spur end-use energy efficiency should deliver both electric reliability benefits and cost containment.
1 In all runs, existing energy efficiency programs and regulations are captured in the electricity demand forecast, which is based on demand projections from AEO 2014.
2 Total Adjusted Costs = Total System Costs + EE Participant Costs + Import/Export Adjustment. See Insights for Modeling the Clean Power Plan, April 2015, Slide 17 for more information.