Is Energy Efficiency the Next Big Thing?

Dr. Paul MacGregor, Senior Vice President, Clean Energy Markets forNexant Inc., has examined key provisions of pending federal energylegislation that would set the stage for the creation of a nationalenergy efficiency market. Here, he outlines the context for thisinitiative and comments on its significance.

The greenest sourceof energy available to power our economy is energy efficiency. From anapplication perspective, energy efficiency provides constant“generation” for better utility system operation, has no geographicallimits, and is already competitive from a capital cost standpoint.

From an environmental perspective, energy efficiency requires no additionalresources such as land and water—whereas even renewable energy requiresthe construction of generation facilities and transmission lines.

In fact, since energy efficiency displaces generation over the entire dayand not just during the daylight hours as is the case with solar, itsenvironmental benefits are greater—replacing not just cleaner peakinggeneration, such as gas turbines, but also “dirtier” baseloadgeneration, such as coal plants.

The most cost-effective andefficient method of accelerating the adoption of any new product orservice is the market. This is also true for energy, where a market hasbeen established for renewable energy in about 30 states. These stateshave adopted Renewable Portfolio Standards (RPS) that require theutilities in their states to meet renewable energy mandates bypurchasing credits that represent the environmental benefits fromcleaner energy production.

These credits (known as RenewableEnergy Certificates or RECs) may be bought and sold separately from theelectricity itself. As a result, due to federal incentives and thesecredits, renewable energy has increased dramatically in the US, withcapacity more than doubling from 16.5 gigawatts to 41.9 gigawattsbetween 2000 and 2008.

Yet, despite this dramatic increase incapacity, renewable energy still only comprises about 2.5% of theelectrical generation mix—just slightly higher than the 2.1 percentrecorded in the year 2000.

In fact, the demand for electricity is growing almost as fast as the increase in renewable energy. This is due to several factors, including the intermittent nature of renewablegeneration such as wind and solar, geographical limitations on plantlocations, and capital cost premiums.

The key to expanding theclean energy contribution to our generation mix is to accelerate andexpand the adoption of the greenest form of energy, energy efficiency.The potential impact of energy efficiency was quantified by a recentreport by the American Council for an Energy-Efficient Economy (ACEEE)indicating that the US can cost-effectively reduce energy consumption by at least 25-30 percent over the course of the next 20 to 25 years.

Unfortunately, most states do not have energy efficiency markets. As a result, energyefficiency has not made significant contributions to the country’sgeneration mix, providing only about half the capacity that renewableenergy is providing to the grid.

However, a few states haveimplemented an energy efficiency market as part of their state RPS forrenewable energy. These states have shown tremendous increases in thelevels of energy efficiency. For example, Connecticut—the first state to incorporate energy efficiency in its RPS—has seen an increase of over800 percent in energy savings from energy efficiency since its market’sfirst year in 2007.

As a consequence, Connecticut has avoidedthe need to develop hundreds of megawatts of new power plants orpurchase millions of megawatt-hours of wholesale electricity—both at acost that is several times greater than the cost of the credits.

Transitioning these successful state energy efficiency markets to a national marketwould create tremendous environmental benefits for the country and savesignificant costs by avoiding the construction of new power plants andtransmission lines.

A national market would also stimulate local economies and job growth due to the site-specific nature of energyefficiency projects. A bill pending in the US Senate aims to accomplishthose goals. The Energy and Natural Resources Committee, chaired bySenator Bingaman of New Mexico, has passed a national RPS this year that includes tradable credits for energy efficiency as part of an overallnational mandate for renewable energy. Signing this bill into law willhelp transition the country to a greener and more energy-efficienteconomy.