The US government is taking decisive actions to cut greenhouse gas emissions across the country. Its latest move, announced in June, was to propose new rules for existing power plants to reduce CO2 emissions. If successful, it could put the US back in a global leadership position for emissions reductions efforts. But without tangible and enduring participation from industry, we could see this initiative cut short at the knees.
Authorized under Section 111(d) of the Clean Air Act, the rule, known as the Clean Power Plan, is anticipated to cut greenhouse gas emissions in the power generation sector by 30 percent by 2030 (based on 2005 levels). The EPA set state-specific carbon reduction targets based on each state’s energy use in 2012, and states have the option to develop individual plans or collaborate with other states to create multistate compliance agreements. The proposed guidelines give states a great deal of flexibility in designing compliance plans and in choosing among compliance mechanisms for meeting their targets.
Recognizing the varying needs of different states – their individual energy mix, industrial makeup, and existing state energy efficiency and carbon reduction policies and regulations – EPA has given consideration to emission reduction strategies throughout the power sector, including at the point of consumption, in designing the proposed regulation.
The focus on energy efficiency in the Clean Power Plan
Energy efficiency features as one of the four “building blocks” EPA proposed that states could use to meet their targets, recognizing its important role in cutting emissions across the power sector and beyond. Efficiency is high on the agenda because it meets all of the Clean Air Act’s qualifications for a compliance mechanism: it is cost-effective, low risk and environmentally friendly.
State and utility-run energy efficiency programs date back to the 1970s. Energy savings generated by energy efficiency measures are used to meet state efficiency mandates, set compensation in energy service contracts, and ensure the reliability of wholesale electricity grids, such as PJM and ISO-New England.
Energy efficiency programs are relatively common in residential and commercial buildings and for appliances, and they are also well understood by policymakers in these sectors. But energy efficiency’s real untapped potential lies with industry. Right now, US industry consumes more energy than any of the other end-use sectors, accounting for about one-third of all primary energy used. By improving energy efficiency by 20 percent between now and 2020, we could save the energy equivalent of 89 coal-fired power plants or 20 percent of the US coal power plant fleet. Combined heat and power (CHP) – where heat is recovered and used to provide useful thermal energy – is another measure that offers similar savings potential. The technical potential for CHP in existing industrial and commercial facilities alone is 130 GW – the equivalent of over one-third of the installed coal-generating capacity in the US, or more than the entire net summer electric generating capacity of California and Florida combined.
To capture this potential we must ensure that CHP and industrial energy efficiency measures feature prominently in state compliance strategies. States have a deadline of June 30, 2016 to submit their compliance plans (June 2018 if they elect to file multi-state plans) and many are not yet clear on what building blocks to include. In developing their plans, state air and energy regulators must seriously consider the potential offered by industrial energy efficiency and the cost-effectiveness and economic development benefits of these measures.
How to design an effective energy efficiency program for inclusion in state compliance plans
The way I see it, states can best meet their proposed targets either by robustly including industrial energy efficiency in existing state-led ratepayer programs, through new credit schemes designed specifically for industry, or a combination of the two. Credit schemes – where industrial sources can bid carbon reductions into compliance markets, engaging directly with utilities or the states for compliance value, but independently from utility ratepayer programs – could be attractive to industrials, as it would provide a novel way to offer up and receive payment for their energy efficiency resources separate from ratepayer/demand-side management programs (which industrials have often resisted).
Either way, both credit schemes and programs (planned or existing) must be designed in a way that meets the needs and special characteristics of industry. Programs designed around industry needs and implemented by trained and knowledgeable program administrators can deliver substantial and cost-effective energy savings that lead directly to GHG reductions.
Key program features that ensure success include providing quality information, technical assistance and incentives to industrial facilities to support equipment upgrades and improved maintenance practices, and integrating energy efficiency throughout the business. Other success factors include the ability to drive energy efficiency in industrial processes improvements as well as in energy support systems (motors, fans), increasing employee engagement and leveraging new developments in smart manufacturing.
But one of the major ways of driving sustained and continual improvements in energy performance, and by extension an ongoing revenue stream for industrials to sell their energy efficiency resources, is to encourage the adoption of strategic energy management (SEM) by industry (also known as an energy management system (EnMS)). SEM or EnMS, whether through the international standard ISO 50001 or a custom energy management approach, are increasingly recognized as a means of overcoming market barriers to industrial energy efficiency. EnMSs equip facilities with practices and procedures to identify and implement opportunities for improvement and to achieve energy savings objectives on an ongoing basis. EnMSs move beyond retrofits of equipment and technologies toward a systems focus that rewards operational efficiency. As a strategic business planning tool, SEM helps to overcome corporate barriers to industrial energy efficiency as senior management and financial, energy management and procurement staff from across the company play an active role in energy use, giving energy efficiency issues a higher profile and priority.
There are already many examples of successful industrial ratepayer programs across the United States. Energy Trust of Oregon’s program springs to mind. By developing strong relationships with their customers and teaming up to identify energy efficiency projects, they have continually increased their energy savings in a cost-effective way. The New York State Energy Research and Development Authority has an industrial program that calculates energy savings on the basis of the energy used per unit produced. A manufacturing plant can add capacity and, if done in an energy efficient manner, is still eligible for program incentives. It’s a more flexible, more sophisticated way of looking at energy efficiency that support loads growth, which in turn supports economic growth and development within the New York State.
However, these programs are by no means the norm. One of the issues plaguing the success of ratepayer programs in some states is that industry is pushing to opt out of these programs due to frustration with the perceived effectiveness of utility-run energy efficiency services. This is especially the case in the Midwest. In states with a high risk of opt-out, a strong self-direct alternative (where a company can choose to self-direct funds that would usually be charged for a ratepayer program directly for energy efficiency investments in their own facilities) can be desirable if it requires robust monitoring and verification of energy savings, and achieves energy savings at levels at least equivalent to those possible under the ratepayer program. Or industrials that have previously “opted out” might choose to opt back in to participate in the Clean Power Plan if given sufficient incentives under a clear compliance pathway. For large industrials, bidding their energy efficiency resources directly into capacity markets – as is already allowed in both the PJM and ISO-NE grids – could be a viable option.
With the Clean Power Plan as an additional driver, all these approaches – ratepayer programs, robust self-direct, opt-ins or capacity market-bidding schemes – could increase industrial efficiency across the US. States developing compliance plans in response to the new rule will have all this to consider and more if they want to leverage energy efficiency as a key compliance mechanism.
As successful industrial programs have already demonstrated, the key to success will be to work closely with all key parties to develop approaches that provide flexibility and a sufficient incentive for industrials to offer up their significant and low-cost energy efficiency resources. States’ ability to forge consensus around practical discussions will help them meet their targets through the most cost-effective and environmentally-sustainable path. In this way, we could see the effort translate into a clean energy future in which all states and sectors of the US economy contribute their fair share, and put the US back on the stage of international climate change talks.