Does Energy Efficiency Have a Role in Mass-Based Clean Power Plan Compliance?

Yes, it does.

Unfortunately, some confusion persists about how energy efficiency measures can be applied to mass-based compliance within the Clean Power Plan. Fortunately, the answer can be summarized in two sentences:

  1. In any situation, energy efficiency is a cost-effective way to reduce demand for electricity, both reducing emissions and helping to avoid or defer other mass-based compliance actions.
  2. States can take action to develop customized plans to further encourage energy efficiency as a means for meeting mass-based compliance.

Now, for some context: in the proposed version of the Clean Power Plan, EPA used energy efficiency as a “building block” for reducing emissions in target setting. In the final version of the Clean Power Plan, EPA removed energy efficiency as a building block. EPA is believed to have done this in an effort to make its rulemaking more legally defensible (i.e., constrained to building blocks “inside the fenceline”). The removal of the efficiency building block, however, seems to have inadvertently caused a great deal of confusion about whether or not energy efficiency would still play a role in compliance.

For states that choose rate-based compliance approaches (see Synapse’s previous blog posts about rate- and mass-based compliance), the final Clean Power Plan explicitly allows energy efficiency measures to produce Emission Rate Credits (ERCs) despite energy efficiency not being one of the building blocks used in target setting. In these states, energy efficiency providers will receive a credit for each MWh of energy saved. This credit can then be sold to polluters who must meet a pounds-per-MWh rate-based target.

In contrast, under mass-based compliance, there is no directly analogous incentive for energy efficiency. In states that choose mass-based compliance, polluters must possess an emissions allowance (measured in tons of CO2) for each ton they wish to emit. Each state’s total number of allowances—aggregated across all emitted units—may not be greater than its target. If demand for electricity is lower as a result of energy efficiency measures, polluters will be called upon to generate less electricity, which will allow the statewide emissions cap to be more easily achieved. So, energy efficiency clearly plays a role in reducing overall emissions. The issue in the final Clean Power Plan (as it is currently written) is that there are very few direct incentives for energy efficiency in mass-based compliance. Said another way, as opposed to rate-based compliance, mass-based compliance entails no requirement that energy efficiency measures receive credits that can be sold to polluters—even though study after study after study have shown energy efficiency to be the lowest-cost resource for achieving CO2 reductions.

So what are the solutions to getting direct credits for energy efficiency in mass-based approaches? The mass-based Model Rule of the Clean Power Plan (i.e., the “off-the-shelf” approach for states that do not want to create an optimized plan, and the approach that will be applied to states who do not file a plan of their own) suggests allocating a very small number of allowances to low-income energy efficiency measures in the first few years of compliance. States, however, can choose a mechanism that provides strong incentives to new energy efficiency measures and are not bound to use the Model Rule. Here are two ways to encourage energy efficiency:

States can give allowances directly to those providing efficiency measures: If states file their own implementation plan, they have the freedom to adjust the annual allocation of new allowances. For example, states could simply hand some number of allowances over to energy efficiency providers in return for creating new efficiency programs. The providers can then sell allowances to polluters, generating revenue and offsetting the costs of installing new lightbulbs, insulation, and energy-efficient appliances. Note that even states which elect—or are mandated— to use the Model Rule have the option to make some adjustments to the distribution of allowances in their state.

States can auction allowances and give the revenues to efficiency providers: Instead of handing over allowances to efficiency providers, states could instead pay the providers directly using revenues generated from allowance auctions. Rather than using a “free allocation” method, some states pursuing mass-based compliance may choose to auction allowances to polluters. The revenue raised in these auctions could be used to fund energy efficiency programs. For example, the Northeast’s Regional Greenhouse Gas Initiative (RGGI) has auctioned allowances and funded efficiency in just this way since 2009. In 2014 alone, $367 million dollars were raised in the RGGI auction. The lion’s share of this was redistributed to energy efficiency, thereby reducing the costs of the electric system for all consumers.

For years we’ve known that energy efficiency is one of the most cost-effective ways to reduce and avoid emissions from generators. That story hasn’t changed, and the Clean Power Plan provides significant flexibility to states to harness this resource. It is up to the states to decide whether to file plans that encourage energy efficiency as means to achieving the statewide cap on emissions. Even if states do nothing, energy efficiency measures will still reduce electricity demand, making it easier to cost-effectively meet compliance with the Clean Power Plan.