I. INTRODUCTION II. UTILITY REGULATION AND RATEMAKING A. The Regulated Utility B. Utility Rate Setting III. PARALLEL DEVELOPMENT: SEPARATE, BUT NOT EQUAL A. Energy Efficiency B. Renewable Resources IV. DANCING BACKWARD: DIFFERING TREATMENT OF RENEWABLE RESOURCES AND ENERGY EFFICIENCY, AND THE OBSTACLES THAT RESULT A. Ratemaking Differences in the Treatment of Energy Efficiency and Renewable Resources B. The Challenge of Measuring Efficiency 1. Evaluating Energy Efficiency and Renewable Resources 2. Obstacles Created by Cost Effectiveness Limits C. A Need for Customer Participation V. UNLEASHING THE POTENTIAL OF ENERGY EFFICIENCY A. Meeting the Challenge of Utility Rate Structures B. Setting Hard Targets for Energy Efficiency C. Streamlining Cost-Effectiveness Tests D. Addressing Market Barriers VI. CONCLUSION
When public utilities plan the resources they will use to meet their customers' load requirements, they have a variety of options from which to choose. (1) An electric utility might elect to obtain supplies from a natural gas-fired generator, a coal plant, or a wind farm. A natural gas utility in the Pacific Northwest might choose from natural gas supplied by producers in the Rocky Mountains or Canada. These options are known as supply-side resources; (2) that is, they are alternatives the utility can use to serve existing load. Utility programs aimed at reducing demand or modifying demand patterns are known as demand-side management programs, or DSM. (3) Energy efficiency is a DSM resource.
Energy efficiency lowers consumers' energy bills, reduces environmental impacts from energy use, stabilizes the electrical grid, decreases the need for expensive infrastructure improvements, and often costs less than supply-side alternatives. (4) As energy production is responsible for the vast majority of greenhouse gas emissions in the United States, (5) energy efficiency can play a key role in national efforts to address global warming. (6) New methods of extraction, including hydraulic fracturing (tracking), may have extended the available supply of fossil fuels, but they have also created new environmental concerns. (7) Energy efficiency decreases the need for additional fossil fuel resources, without requiring additional resources in its stead. This range of benefits--with little to no downside--may be why politicians, academics, and regulators have lined up to support energy efficiency, often establishing it as a first priority resource. (8)
As a supply-side option, renewable resources are quite different from energy efficiency resources. Rather than decreasing demand, these resources meet demand--they simply do it in an environmentally preferred way. Renewable resources offer benefits similar to energy efficiency. Renewables diversify a utility's portfolio away from fossil fuels, reduce U.S. dependence on foreign imports, mitigate environmental harms, and create new market opportunities for U.S. businesses. (9) Renewable resources are essential to our world's long-term energy future; even with the best technological advancements, a utility's supply-side options cannot all be met with energy efficiency. On the other hand, renewable resources may increase the strain on the electric grid, require additional investments in transmission and distribution infrastructure, or create undesired environmental hazards. (10)
Given the balance of costs and benefits offered by the two resources and the importance ascribed to increasing energy efficiency, one might expect that renewable and efficiency resources receive, at a minimum, comparable regulatory treatment. However, this is not the case. In 2009, renewables constituted 76% of all energy tax incentives, while energy efficiency only constituted 3%. (11) Twenty-nine states have now adopted renewable portfolio standards (RPS) …