Paving the way to recovery with utility-funded energy efficiency

Utility-funded energy efficiency programmes are found across the world. Utility engagement can be mandatory or voluntary and include a range of different designs. Increasingly, these programmes are strengthening the alignment of utility business models and incentives to enable them to fully value and pay for energy efficiency as a cost-effective resource to the energy system.

The most prevalent type of utility-funded programmes are energy efficiency obligations – referred to in North America as “energy efficiency resource standards”. These programmes place a binding target on energy utilities (often distributors or suppliers), most often to meet a defined level of energy savings over a specified period of time. They include programmes with tradable “white certificates” such as those in Australia, France and Italy.

Several other jurisdictions have competitive tendering schemes or auctions for energy efficiency in place that are also often funded by energy utilities. In addition, there are a number of jurisdictions with voluntary utility-funded programmes.

It will be important for governments shaping economic recovery strategies to build on existing energy efficiency programmes and policies as much as possible. Creating jobs rapidly will rely on quick-moving “shovel-ready” projects, existing supply chains, and expertise that is already in the market or can be quickly developed. It will also be important to keep it simple, finding the most straightforward opportunities for rapid deployment of measures and building on these over time.

To create jobs quickly in the energy efficiency sector, it is important to consider the full suite of existing programmes and their potential to deliver against stimulus objectives. This also means involving energy utilities that are positioned to help identify and promote energy savings activities (for instance under voluntary schemes).

Utility-funded programmes are one of the most widespread methods of improving energy efficiency around the world. In Canada and the United States, combined spending on utility-funded energy efficiency and demand response programmes totalled almost USD 9 billion in 2017. Globally, utility-funded programmes invested around USD 26 billion in energy efficiency in 2015, accounting for 12% of the USD 221 billion invested in energy efficiency, including in electricity, gas and other fuels. As of 2020, there are 49 utility-funded energy efficiency programmes in 24 countries (in 2019 and 2020, Croatia and Cyprus1 launched new energy efficiency obligations).

Efficiency measures save households, businesses and governments money. Energy savings lower energy bills for programme participants, including low-income households, which many programmes prioritise. Energy efficiency drives down energy system costs for everyone by helping to avoid and defer more expensive investments in energy production and network infrastructure. It also improves energy system resilience and flexibility, alongside demand response and other distributed energy resources, by helping to integrate and balance supply-side resources.

Importantly, energy efficiency programmes also deliver public health benefits by making buildings healthier and more comfortable, by reducing indoor and outdoor air pollution, and making our towns and cities healthier places to live.

The median cost of these programmes is significantly lower than the cost of supplying energy. Across the world, the total cost of a kilowatt hour of energy saved is USD 0.034 to USD 0.051 of lifetime savings, and the weighted average is USD 0.026 to USD 0.039 of lifetime savings. This is well below the average cost of a kilowatt hour of electricity or gas supplied in most places.

In Europe, energy efficiency obligations (or utility-funded programmes) accounted for a third of all policy instruments deployed between 2014 and 2016 to meet the European Union’s binding annual energy savings targets. The Energy Company Obligation programme running in the United Kingdom between 2013 and 2015 avoided roughly EUR 2 billion worth of traded EU ETS emissions allowances and EUR 5 billion worth of non-traded carbon emissions over the lifetime of the implemented measures. The Italian white certificate scheme delivered an average of 5.9 mtoe of yearly additional energy savings between 2005 and 2018, and around 45% of the savings required to meet the energy savings target under Article 7 of the European Energy Efficiency Directive.

As energy systems modernise, decarbonise and electrify, new business models are emerging that take advantage of the time and locational value of energy efficiency to the energy system. Jurisdictions such as California, New South Wales (Australia), New York State and the United Kingdom are re-shaping regulatory frameworks to align utility business models to unlock this potential. These business models promise to enhance reliable operation of energy systems while creating and diversifying energy efficiency jobs.

According to the IEA World Energy Outlook Special Report on Sustainable Recovery, investing in energy efficiency creates around 10-15 jobs per USD 1 million invested.2

Energy efficiency programmes drive market transformation, shifting markets towards more efficient appliances and equipment. In 2009, New South Wales launched the Energy Savings Scheme, which requires utilities to achieve end-use annual energy savings targets. Under the scheme, accredited energy efficiency service providers were able to quickly develop and scale up business models to carry out lighting upgrades, which were one of the most cost-effective measures eligible under the scheme.

Under the programme, utilities can achieve compliance by creating and surrendering energy savings certificates (reflecting energy savings achieved) through activities they implement themselves, or purchase from the market through third party accredited certificate providers. The uptake of lighting upgrades in New South Wales closely tracked utility energy efficiency targets under the Energy Savings Scheme. While today the energy efficiency lighting market is reaching maturity and the scheme is shifting its focus towards other measures, the scheme promoted rapid growth in that market by including lighting as an eligible measure with clear and simple requirements.

The economic benefits of utility-funded energy efficiency programmes are not restricted to the creation of direct and indirect jobs. There are also several “ripple effects” as more disposable income becomes available to consumers due to reduced energy bills. This can be invested in other goods and services, creating additional (induced) jobs. A study of two voluntary utility-funded programmes in Switzerland found that beyond the direct impact on employment, the majority of macroeconomic benefits were derived from such ripple effects as consumers re-directed their disposable income from energy bills to other goods.

While these ripple effects have economic and social benefits, they also underscore the need for a framework that ensures complementary policies are in place to meet broader clean energy and decarbonisation objectives. The proposed European Green Deal, an example of a long-term framework, is designed to transition Europe to be climate neutral by 2050.

Many utility energy efficiency programmes have been in place for several years, with well-established supply chains, service providers, administrative systems and financial capacity. Utilities have a relationship with customers, facilitating outreach and identification of additional energy savings opportunities. For example, Efficiency Vermont in the United States expanded outreach during the state Covid-19 lockdown to understand the challenges that residential and business customers are facing. In response it adjusted programmes to support economic recovery where it is most needed, such as among small businesses.3

The challenges that utility-funded energy efficiency programmes will face, and the opportunities they will offer to recover and build up energy efficiency jobs, will depend in part on how they are designed. For instance, the sectors a programme focuses on will determine where energy savings accrue, which supply chains are established, and where further savings opportunities might lie:

Targets

• Energy (kWh) or capacity (kW) savings (or both)
• CO₂ reductions
• Spending target
• Occasionally efficiency target is combined with a target for demand response or renewable energy production.

Fuel(s)

• Electricity
• Gas
• Heat
• Transport
• Other

Objectives

• Energy savings
• Capacity savings
• Peak load savings
• Climate change mitigation
• Fuel poverty
• Public health
• Least cost energy system

Obligated party

• Distribution company
• Retail supplier
• Energy efficiency utility
• Other third party

Eligible sectors

• Buildings (households/residential, commercial)
• Transport
• Industry
• Agriculture
• May include priority sub-sector such as low-income households.

Priority measures

• Insulation
• Complex/multiple measures
• Industrial energy efficiency
• Other

The Covid-19 crisis has drastically slowed the implementation of energy efficiency measures, including those under utility-funded programmes. Unprecedented job losses and suspensions have threatened both the short and long-term trajectories of many energy efficiency programmes.

Utilities face challenges as the number of customers unable to pay their bills increases and protective measures are put in place to prevent disconnections. At the same time, many customers are facing higher energy bills as they spend more time at home. The approach of heating and cooling seasons has further squeezed pocketbooks.

Yet improving energy efficiency can be a key part of the economic recovery by boosting customer energy affordability and the development of reliable, least-cost energy systems. For customers, energy efficiency measures can cut bills and enable affordable access to essential energy services such as cooling. From an energy systems perspective, energy efficiency can avoid or defer more expensive investments in generation and network infrastructure and cost-effectively enhance system flexibility.

With the Covid-19 crisis still unfolding, many jobs have been lost across the economy, including energy efficiency jobs. In March and April, the US Bureau of Labor Statistics recorded more than 400 000 unemployment claims in the energy efficiency sector, representing 70% of unemployment claims across the energy industry. And while job losses in clean energy (including energy efficiency) slowed in May 2020, there were still 27 000 job losses that month. Many of these jobs are directly connected to implementation of utility-funded programmes.

Because job categories are classified differently from one jurisdiction to the next, it is also worth considering how many jobs have been lost in sectors that deploy many energy efficiency measures, including:

• Construction and renovation – one of the hardest-hit sectors of the economy: According to the International Labour Organization, construction jobs are expected to experience a “medium” impact. In the United States, the construction sector registered 975 000 job losses in April, up from 29 000 in March. However, in May an increase in construction jobs recovered almost half of April’s losses, reflecting relaxed public health restrictions in parts of the country.
• Industrial sectors: Many energy efficiency programmes focus on industrial sectors (including a few that are strongly focused on the industrial sector, such as in Italy and Denmark). According to the International Labour Organization, manufacturing jobs are among the most vulnerable to the Covid-19 crisis.

At the same time, certain measures may stem job losses and could be accelerated or expanded. Many of these measures rely on digital technologies and platforms to enable activities that comply with social distancing requirements:

• Public and commercial buildings may be empty or only partly occupied, offering opportunities to adjust buildings systems at low cost and to implement efficiency measures.
• Customer outreach, energy audits and data analysis can be undertaken remotely.
• Remote outreach can also advance behavioural programmes, especially for households. For example, Ohm Connect, a company in the US southwest, is deepening household customer behavioural programmes as more customers stay at home).
• Appliance replacement programmes can incorporate curbside pickup for old appliances and online purchasing of new appliances. Efficiency Vermont has been implementing such measures as part of its strategy to adapt its programmes to the Covid-19 crisis.
• Industries operating at part load may have the bandwidth to bring forward planned energy efficiency measures.
• Companies that are successfully continuing operations, such as online retailers, may provide an opportunity to scale up energy efficiency programmes.
• Online platforms can be used to provide educational programmes for consumers, and to train workers in key energy efficiency skills needed in the medium to longer term to kick-start the sector after lockdown measures lift. For example, the state of Massachusetts’ Mass Saves programme is offering free training for contractors, and many training programmes are going virtual.

Public health measures taken to contain Covid-19 have a wide range of implications for achieving energy efficiency programme objectives. At the same time, several measures are available to mitigate the slowdown across different utility obligation structures, as discussed below this table.

In all cases, utilities will continue to be obliged to provide reliable energy. Energy efficiency continues to be an important, cost-effective tool to meet this objective. During the crisis, utilities can continue to build the side of their business that manages efficiency programmes, providing an opportunity to stem job losses.

Energy efficiency can increase chances of recovering deferred payments and reducing non-payment over time. In the case of demand response programmes, there is an opportunity to focus on residential consumers and to align them with shifting demand curves.

Even where the energy savings target is relative and decreasing proportionally to the decrease in sales, it is important to anticipate increases in sales post-COVID, and to ensure that programmes do not contract to a point that they are unable to pick up again as the economy recovers.

In programmes specifically focused on CO₂ reductions, as well as in those focused on energy savings, it is increasingly important to look at the role of fuel switching to contribute to climate change mitigation through electrification and increased opportunities for demand-side flexibility.

Many other considerations will affect how programme administrators, regulators, and policy makers adjust utility-funded programmes during the Covid-19 crisis and recovery period:

• The implementation status of a programme. Meeting 2020 targets will be more challenging than meeting target deadlines set in later years. 2020 target deadlines might be extended or carried forward into the next year, with a clear plan for catching up and meeting targets in the near future.
• The performance of programmes before the current crisis. Over-performing programmes may have built in some flexibility in weathering the slowdown, though this is not a reason to delay recovering from the slowdown.
• The leverage factor built into programmes. The “leverage factor” – how much consumers are willing to pay towards an efficient appliance or measure – is likely to change, at least for the near-term. Programmes may need to take into account the ability and willingness of consumers to contribute to the cost of a new appliance or building renovation based on pre-COVID calculations.

Around the world, energy consumption has decreased in most sectors, from transportation to industry and buildings. One exception is household consumption, which has generally risen as people have been ordered to stay at home. This increase, however, is not offsetting the overall reduction in consumption from other areas such as offices, schools, businesses and factories.

Lower sales mean lower utility revenues. Depending on the regulatory scheme, utility owners may have the opportunity to recover some of these revenues later, but in the short run they have less cash flow. The Covid-19 crisis presents another example of the security that revenue decoupling (also referred to as revenue cap regulation) can provide to energy utilities. With decoupling, utilities have a defined level of revenues they can recover – regardless of whether sales go up or down. Decoupling also reduces the risk of lower sales due to weather fluctuations and other factors that can reduce demand. It removes the disincentive to invest in end-use energy efficiency and facilitates the transition to a utility business model in a highly efficient, electrified and renewables-powered system.

In all cases, uncollected bills present an immediate challenge. Many jurisdictions are protecting consumers through measures such as suspending disconnections, deferring bill payments, and limiting or lifting late fees for customers who are unable to pay.

Beyond these factors, other risks for utilities include an increase in bad debts, cash drains at the working-capital level, operational challenges and higher regulatory risk. In a survey investigating the impact of the crisis on major Italian utilities, respondents identified lack of liquidity and access to credit as major challenges, together with disruptions in international supply chains.

Many utility customers face significant challenges. Businesses – especially small and medium companies – have been hit particularly hard by the crisis. Many households face higher bills as people spend much more time at home. Seasonal changes are compounding this, as the onset of summer in the northern hemisphere pushes up the use of air conditioning and fans and people in the southern hemisphere turn on their heaters.

While job losses are hitting all sectors, lower-income jobs are being hit the hardest. This is exacerbating the financial situation of many households and leading to record high numbers of households unable to pay their energy bills. As of the end of March 2020, 22 states in the United States and Washington, D.C., as well as several utilities had suspended the ability of utilities to disconnect customers.

Energy efficiency can play an important role here, as energy-saving measures can lower bills. This is particularly true where energy-saving measures address the main energy-consuming appliances responsible for space heating, space cooling, and hot water heating. In addition to lowering bills (and facilitating bill payment), these measures can help relieve demand on power systems and be made use of to offer demand response services.

The slowdown in implementation of utility-funded energy efficiency programmes may continue in the near term. Most jurisdictions, state and federal, have restricted economic activity to “essential services” such as healthcare, food and public safety at some point in recent months. Even where restrictions on economic activity are beginning to loosen, it is not clear whether or how fast they will continue to ease, or whether restrictions are likely to return, due to the ongoing risks and challenges involved in stemming the spread of Covid-19.

How can programme administrators, regulators and policy makers structure a response under these circumstances? The following principles can provide a starting point:

• Energy efficiency has a vital role in countering the impact of Covid-19. Energy efficiency creates jobs through “shovel-ready” projects, improves electricity system resilience and energy affordability, reduces the emissions that cause climate change, and provides health benefits, all at reasonable cost. Near-term measures can be designed to support the build-up of permanent energy efficiency jobs and career ladders, securing the supply chains and skills needed for robust energy efficiency markets to support these goals.
• Flexibility is key to recovery. Programmes will have to adapt to maximise recovery opportunities. This will require flexibility on the part of programme administrators, regulators and policy makers.
• Short-term solutions should not compromise best practice. While flexibility is needed in the near-term, the principles underlying good programme design must remain. These include cost-effectiveness, additionality, and equity among consumer groups.
• Maintain the integrity of long-term targets. Near-term flexibility in areas like timelines to meet targets and eligible measures should not be used to reduce long-term ambition. Rather, they can be seen as a way to jump-start economic activity with an eye to continuing – or even expanding – longer-term ambition.

The following key questions can help direct decisions by identifying opportunities in the near-, mid- and long- term.

• What can be done now to redeploy resources to keep programmes as active as possible?
• What steps can be taken in the short term (6-9 months) as restrictions ease, and how can these be aligned with objectives of economic stimulus? How can lost or furloughed positions be reinstated or adapted?
• What are other near-term (9-18 months) opportunities to stimulate the economy within the structure of utility-funded energy efficiency programmes?
• In the longer term, how can programmes be re-aligned to meet long-range objectives?

Within each of these timeframes, several measures can be taken.

Digital technologies have a prominent role to play here, not only while social distancing rules apply but also over the longer term. Such technologies include smart meters and sensors, tools for conducting virtual audits, and online platforms for workforce training. With the help of advanced analytics, data from smart meters and sensors can be used to:

• boost outreach and learning under behaviour change programmes
• track changes in consumption patterns
• assess savings
• facilitate monitoring and verification
• enable real-time monitoring and identification of savings opportunities across end-use sectors.

In this way, there is an opportunity to leverage digital technologies, exploring the full value that they can offer to programmes and consumers.

To enable programme administrators to respond nimbly, some flexibility with programme rules may be needed, within legal limits. There are already examples of this happening. In New York State, regulators are introducing flexibility to allow programme administrators to modify programmes. Adjustments may be needed to the following areas:

• Targets. Where 2020 is the end of a target period, as in the European Union, programmes may not be able to meet their goals in time. There may be a need to extend such deadlines or carry forward targets to next year. The aim is not to weaken longer-term targets, but to provide space for programmes to regain momentum precisely so that they catch up with targets.
• Streamline delivery of stimulus measures. This may require adjustments such as:
  - reducing administrative barriers, such as the process of changing the balance of programme investments in different sectors, or clearing innovative measures and behaviour change programmes
  - adjusting or loosening additionality rules to enable rapid uptake of energy efficiency measures
  - relaxing cost-effectiveness criteria.
• Priority sectors. Focusing on measures that can be implemented in the near term may require re-balancing programme portfolios to concentrate on the biggest near-term opportunities. This may also require flexibility in ring-fencing or other incentives for priority sectors or measures.

In considering strategies to stimulate energy efficiency, it will be important to consider the complexity involved in adjusting programme rules for utility-funded energy efficiency. In some cases, parallel programmes or support schemes may have more flexibility to adjust and expand during the crisis. Such support schemes can also be integrated into utility-funded programmes.

For example, the government of New South Wales launched a programme in parallel with its energy efficiency obligation to build service provider capacity and jump-start undersubscribed energy efficiency activities such as residential lighting and air conditioner upgrades. Under this programme, the government purchases and retires certificates for approved suppliers and activities at the contracted price, rather than utilities purchasing certificates. This programme is designed to facilitate a smooth transition from service providers to the energy utility funded programme after the life of this government programme. Stimulus programmes could consider similar models.

Energy efficiency, even where cost-effective, faces barriers to implementation. The upfront cost of energy efficiency measures is one of the barriers to their implementation. Stimulus funding could help overcome this barrier.

The typical leverage factor of utility-funded programmes is between two and three. That is, every dollar of utility funds spent leverages between one to two dollars of additional funds. This figure is an average, with different customer classes having differing abilities to pay for energy efficiency improvements. Industrial customers or middle-to-high income households may be able to make energy efficient purchases or investments with the help of a small subsidy, while low-income households often rely on a subsidy up to the full cost of the investment.

The Covid-19 crisis will affect these leverage factors as the economic downturn restricts the ability of many households and businesses to pay. To ramp up energy efficiency activities quickly will require additional funds. Unspent utility energy efficiency programme funds represent one source. Stimulus funds will be another important source, and one that can help align utility and stimulus programmes. Other sources may include carbon revenues in jurisdictions with cap-and-trade systems, and energy efficiency bonds that take advantage of record-low interest rates.

How might stimulus funding support utility-funded energy efficiency programmes? Utilities could receive stimulus funding or qualify for loans and loan guarantees to support stimulus-related activities. These could come on top of loans to help cover bill relief for customers who are unable to pay. Utilities are in a position to help customers access bill relief while at the same time identifying and implementing opportunities for energy savings to reduce bills and improve energy services more permanently. Where utilities are deferring bills, energy efficiency even can reduce subsequent monthly repayment amounts by lowering running monthly bills.

Stimulus funding can help the small businesses that are involved in the delivery of most energy efficiency measures. During lockdown, funds can help businesses strengthen their remote working capabilities, retain staff and cover overhead costs. These same businesses would then be in a position to carry out energy efficiency measures under utility programmes as restrictions gradually lift. The CARES Act in the United States provides an example of a relief package that includes assistance for small businesses, which could help SMEs involved in delivering energy efficiency to weather the crisis.

Stimulus funding can also help expand public support for appliance replacement programmes, offering additional or parallel incentives to replace aging equipment that may already be part of a utility-funded or other energy savings programme. These accelerated replacement programmes can provide low-cost or, in some cases, no-cost services, replacing old, energy-guzzling appliances with new, energy-efficient ones.

Past experience shows that implementation of energy efficiency economic stimulus is best grounded in realistic assessments of local administrative capacities, workforce skills, the nature of local supply chains and manufacturing capabilities, and the political challenges likely to emerge. 

While there is an immediate need to ease the worst effects of the Covid-19 crisis and to ramp up economic recovery as quickly as possible, it is important not to lose sight of longer-term objectives. Relief and recovery efforts can be designed to help build momentum towards these long-term goals, creating a diverse and sustained job creation mechanism.

Some jurisdictions have already raised their ambitions for energy efficiency. The state of New Jersey has increased annual energy savings targets for both electricity and natural gas energy savings programmes, set a performance-based cost recovery mechanism to support delivery of energy savings activities, and will compensate utilities for lost revenues. ConEdison, a utility in New York, has announced a USD 1.3 billion pandemic resilience plan for the summer, which includes measures to save consumers energy in the face of the expected increase in home energy use.

Many countries have put in place ambitious targets for climate change mitigation, affordable and reliable energy, and energy access. According to the IEA World Energy Outlook, energy efficiency measures achieve around half of the CO₂ emissions reductions up to 2030 in a scenario that holds the global temperature increase to below 1.8°C with a 66% probability without reliance on global net-negative CO₂ emissions. Achieving this will require an increase in the pace of energy efficiency improvements.

Energy efficiency is a pillar of the clean energy transition. It reduces growth in overall demand in energy systems and serves as a source of flexibility, in conjunction with demand response and other distributed energy resources. The economic growth potential of these services will only expand with improved data and data analytics.

For this reason, it will be important to modernise regulatory frameworks to align utility incentives to capture the full suite of opportunities that energy efficiency and other distributed energy resources can offer. Depending on where in the process a given jurisdiction is, this may involve introducing revenue decoupling or revenue-cap regulation to loosen the link between sales volumes and revenues, incorporating incentives such as shared savings to strengthen the business case for utilities, and implementing performance-based regulation. It will also require changes to measurement and verification protocols, shifting from deemed savings to metered savings.

These developments will help foster the kind of innovation that is already driving new jobs in sustainable industries. Recent analysis by the American Council for an Energy-Efficient Economy found that in 2019, 25 energy utilities were using rate design to encourage off-peak charging of electric vehicles. Another 32 utilities have piloted programmes involving smart building technologies, online market platforms for energy efficiency products, finance mechanisms for commercial energy efficiency, and the integration of a variety of distributed energy resources, such as demand response and storage with efficiency.

For all of these reasons, it is important to revisit short-term actions taken to reinvigorate utility-funded energy efficiency programmes over time, and to ensure that as energy efficiency jobs stabilise they also transition to ensure sustained employment and progress on energy efficiency. 

Utility-funded energy efficiency programmes are an important source of local jobs and provide many benefits to citizens, energy systems and the economy. For these reasons, it is important to consider the effects of the Covid-19 pandemic on these programmes, alongside other energy efficiency programmes, and ways to mitigate job losses and bring jobs back quickly.

Responses can be phased, with measures focused on the immediate, near, mid and long term. Immediate and near-term measures (within a timeframe of about nine months) could include remote audits, data analysis, customer outreach and expansion of behavioural change programmes. From 9 to 18 months, as public health restrictions ease further, measures could be deployed such as replicable building retrofits; draught proofing; heating, ventilation and air-conditioning; and energy management systems in industry. In the longer term, it will be important to rebalance programme portfolios and build on shorter-term measures to secure sustained growth of energy efficiency programmes, aligning them with broader social, environmental and economic objectives.

As economic stimulus packages are developed, energy efficiency should be included as a key sector with strong job creation potential. For utility programmes, programme administrators and policy makers can be creative and flexible in using existing programme structures to support economic activity and need to focus on measures that can be implemented during the ongoing health crisis.

Early action to stimulate energy efficiency jobs can support continued growth across economic sectors, from construction to industry, services, information technology and many more. A focus on utility energy efficiency programmes can play a key role in modernising regulatory frameworks and business models to better align utility incentives with energy efficiency and demand-side flexibility, and to ensure that the energy transition benefits fully from digital technologies.