Navigant Research Blog

A Retail Focus on Energy Efficiency and the Clean Power Plan

— May 28, 2015

Frank Stern and David Purcell contributed to this blog.

The U.S. Environmental Protection Agency (EPA) issued its proposed Clean Power Plan (CPP) rule in June 2014 to reduce carbon emissions from existing fossil-fired electric generating units (EGUs) over 25 MW. The rule is primarily focused on coal-fired plants across the United States. Total carbon reductions targeted by the EPA are substantial: the CPP proposes carbon emission reductions totaling 30% relative to 2005 emissions by 2030, with alternative approaches totaling approximately 23% in reductions by 2025. During the public comment period, the proposed rule received nearly 4 million comments from utilities, states, and other stakeholders. The EPA’s final rule is expected sometime this summer.

While the CPP does not propose state-by-state least-cost planning or specifically require energy efficiency (EE) for carbon reduction compliance, states should pursue EE because, as discussed below, EE is recognized by the EPA and numerous states as a highly cost-effective resource and a prudent investment. Reaching the EPA’s Building Block 4 (BB4) 1.5% annual EE savings goal is likely to require a focused effort in many states. A recommended approach to working toward the savings goal is developing an EE retail strategy.

Advantages of Using EE

Using BB4 to reach a portion of states’ CPP requirements is important since:

  • EE is typically a least-cost resource for reducing carbon emissions
  • EE provides positive economic benefits, while reducing carbon emissions
  • EE will decrease energy demand, allowing utilities greater supply-side flexibility to implement other Building Blocks through 2029

Considerations in Meeting BB4 EE Savings Targets

States with larger utility EE portfolios and growing programs are likely to meet BB4 goals more easily than states with less developed programs and low annual savings. Existing EE portfolios could require increasing EE measure incentive levels to drive participation. Rather than relying only on existing portfolios, it is more likely that all regions of a state and its utilities (including munis and co-ops) should be involved in reaching the BB4 goal.

The figure below shows that states that have undertaken EE program development have growing EE portfolio savings near 1.5% and have higher first-year costs than other states. Many states have not undertaken EE initiatives for extended periods and resulting incentive levels are low in comparison.

 Southeast Incremental Savings vs. First Year Cost of Savings: 2011

Southeast Incremental Savings

      (Source: Navigant Analysis)

While the CPP compliance period does not begin until 2020, states and utilities should consider increased BB4 efforts today to gain momentum toward the 1.5% savings goal. Potential studies can be used to determine maximum achievable EE savings. Such studies can reveal the range of electricity savings and benefits expected over time. In determining EE’s role in reaching CPP goals, states and utilities should assess EE potential to decide how to approach developing BB4 savings.

Central to an EE retail approach is understanding and using potential studies, benefit/cost analyses, and evaluations of EE portfolios to gain an understanding of the benefits and challenges of expanding EE portfolios. Designing and implementing EE programs with proper financial incentives and cost recovery mechanisms can lead to positive net benefits for utilities, customers, and regional economies.

Initiatives, Policies, and Programs

There are a number of approaches to support development of EE initiatives at a utility or in a state to meet the EPA goals. Some initiatives include:

  • Establish energy savings targets within a company or at the state level
  • Assess state performance incentives and cost-recovery mechanisms that move EE toward being equal to other supply-side resources
  • Integrate EE into the resource planning process in regulated markets– incorporate EE into electric integrated resource planning as an equal resource option to generation
  • Require stringent evaluation, measurement and verification of EE programs

State policies should be assessed to create proper incentives and foster growth. Cost recovery as the sole incentive to implement EE portfolios is insufficient to foster savings. Financial incentives and policies that place EE on similar or equal footing to supply-side resources is needed for utilities to actively move toward the 1.5% target.

 

Can Demand Response Help States Comply with the EPA’s Clean Power Plan?

— April 24, 2015

When the U.S. Environmental Protection Agency (EPA) released its draft Clean Power Plan (Section 111d) proposal last year, demand response (DR) was not specifically called out in any of the potential building blocks used to calculate state emissions targets. While it may reasonably be included in the End-Use Energy Efficiency block, some players in the DR space feel that a more explicit role is required to ensure that it gets the proper attention by states when they are developing their compliance plans.

Not Straightforward

To date, there has been no definitive analysis showing that DR can actually reduce carbon emissions. The case is not necessarily as clear as it is for energy efficiency, where more efficient equipment simply replaces less efficient equipment, leading to a straightforward engineering analysis of energy savings:

  • DR is not a permanent replacement, but rather, a temporary reduction in load in response to reliability or economic signals.
  • The reduction must be measured against some kind of baseline, for which there is no industry standard.
  • Some of the loads may be shifted to other times, so there may not be full kilowatt-hour (kWh) savings.
  • Some DR participants use behind-the-meter generation to respond, so depending on the fuel source, emissions could even increase instead of decrease.

Clearly, more analysis will be required to make states and the EPA comfortable with including DR in their plans.

Sniff Test

In order to take a first pass at the issue and get some initial thoughts into the comment record for the Clean Power Plan, the Advanced Energy Management Alliance contracted with Navigant in November 2014 to perform some high-level modeling and analysis to see if DR even passed the sniff test and is worth maintaining in the conversation. Navigant employs detailed market models that could perform such analysis on an hourly basis if a specific case should arise, but for this exercise, a simplified version was utilized to get an annualized view of the results.

Navigant looked at the PJM Interconnection, Electric Reliability Council of Texas (ERCOT), and Midcontinent Independent System Operator (MISO) markets, focusing on two different types of emissions savings: direct and indirect. Direct emissions reductions include peak load reductions through capacity and emergency DR programs and ancillary services markets like spinning reserves and frequency regulation where DR can participate. Indirect emissions consist of DR contributing to coal plant retirement decisions and allowing for increased levels of renewables penetration.

The analysis found that DR could directly reduce carbon emissions by more than 1% and that its indirect role in the economics of fuel mix and plant operations could result in reducing carbon emissions by an additional 1%.

Direct Emissions Reduction from DR Peak Load Reduction

(Source: Navigant Research)

Valuable Input

This emissions reduction potential is significant when compared to the EPA’s targets, which propose to reduce carbon emissions from fossil fuel power plants by 20% from 2012 levels by 2030. Perhaps the EPA will have heeded this input and will include DR more explicitly in its final rule expected in June. I am presenting these results at the Peak Load Management Alliance (PLMA) Spring Conference in Tucson on April 28, so we will continue to spread the message.

 

New EPA Proposal: An Environmental Victory?

— March 29, 2013

The U.S. Environmental Protection Agency (EPA) today announced a proposal to lower tailpipe emissions levels from passenger cars and trucks.  To be phased in from 2017 to 2025, the proposed rule also calls for average sulfur content in gasoline to drop to 10 parts per million by 2017.  Meanwhile, the Obama Administration appears to be giving up on a carbon tax and there are warning signs that the EPA will retreat on its power plant greenhouse regulations.  This new announcement thus seems like a return to the EPA’s comfort zone – regulating criteria pollutant emissions from passenger cars.

However, the proposed regulation does in fact support the EPA’s efforts to limit carbon emissions.  The timing for these proposed standards is clearly aligned with Corporate Average Fuel Economy (CAFE) standards, which will begin to ramp up from 35.5 mpg in 2017 to 54.5 mpg by 2025.  The automotive original equipment manufacturers (OEMs) are going for an “all of the above” approach to complying with the 2025 regulations.  They know they cannot get there just with alternative fuels, so they need to squeeze everything they can out of conventional gas cars.  Low-sulfur fuel allows them to do that by using technologies like direct injection engines.

Indeed, it is clear from the auto industry’s response to today’s announcement just how on board they are with the proposed regulation.  The Association of Global Automakers and Alliance of Automobile Manufacturers both expressed support, citing the benefits of a single, national low-sulfur fuel standard.  Automakers will not only be able to improve fuel economy, they will also be able to sell the same cars in all 50 states – since the EPA rule harmonizes with California’s more stringent standards.

It’s good that the Administration has Big Auto in its camp, because Big Oil is not happy with this proposal.  In fact, the rule will force major investments in refinery upgrades in the United States.  Petroleum refineries are already engaged in a battle with the EPA over its cellulosic ethanol blending mandates, so this new ruling will add more fuel to their argument that the EPA is placing an undue burden on the oil industry.

Another aspect of the proposed requirements that may cause controversy is that the EPA is in favor of changing the emissions “test fuel” from gasoline with no ethanol to an E15 blend.  While most gasoline in the United States is close to an E10 blend (i.e., with 10% ethanol), the new test fuel will actually leapfrog over this level to the more aspirational E15 target.  As such, this proposal could face blowback from both automakers and refiners.

If I had to make a prediction, the broad rule on emissions and fuel sulfur will stand, though some details such as the E15 test fuel may be tweaked, since automakers can more easily meet stricter CAFE standards with the new rule in place.  If the proposal does stand, the White House would gain an early environmental victory in its second term.  Such a victory would also buttress the ambitious fuel economy goals set in the Obama Administration’s first term by giving OEMs more options for compliance and thus holding off potential challenges to the regulation.

 

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