The Contribution of Energy Efficiency to the Reliability

This paper examines the role of energy efficiency in enhancing electric system reliability. In many states that have enacted utility restructuring legislation, and thus far in Congress, energy efficiency advocates have had trouble convincing legislators of the connection between end-use efficiency and system reliability, and thereby persuading them to include support for end-use efficiency programs in restructuring legislation. Most often the small “wires charge” proposed as a means of funding such programs has often been labeled a “new tax.” Meanwhile, the prospect of interstate competition and retail customer choice has led utilities to slash spending on energy efficiency and other demand-side management programs. The foregone energy savings and demand reductions have contributed to declining reserve generation capacity margins, a trend that North American Electric Reliability Council (NERC) forecasts show continuing through 2008. The authors contend that end-use energy efficiency programs can make a very substantial, cost-effective contribution to electric system reliability over the next decade by reducing both the national base load and regional and local peak loads on the electric system. We do not contend that energy efficiency can completely eliminate the need for any new generation capacity or enhancements to the transmission and distribution network, but that energy efficiency can cost-effectively and significantly reduce the need for both while providing a much-needed margin of insurance against the uncertainties inherent in the utility industry’s transition to competition. Since the most oft-cited reason for electric utility restructuring is to save consumers money, policymakers should not fail to include support for end-use efficiency programs in restructuring legislation. Introduction: The Historic Role of Energy Efficiency Energy efficiency has long been a national public policy priority, and has made a substantial contribution to the nation’s energy supply, thereby “lightening the load” on our electricity generation, transmission, and distribution system. Analysis by the Alliance to Save Energy, illustrated in Figure 1 (Alliance, 1998) reveals that energy efficiency the energy saved by efficiency improvements implemented between 1973 and 1998 – made energy efficiency the nation’s second largest source of energy (and largest domestic resource) by 1998. This analysis accounted for changes in energy intensity due to structural changes in the economy, such as a decline in energy-intensive industries and the increasing share of the nation’s Gross Domestic Product (GDP) derived from services. While steep increases in energy prices were undoubtedly a strong driver for improvements in energy efficiency, many of the gains were purposeful, policy-driven, and accomplished through targeted research and development and technology deployment programs. Figure 1. Sources of Primary Energy in the U.S. Economy, 1998 The rise of energy efficiency as a policy objective dates back to the 1970’s, when increasing electricity demand, higher capital costs, and rising electricity prices led to heightened public awareness of the need to moderate energy use with conservation efforts. Three federal laws enacted in the 1970s laid the groundwork for the various demandreduction and load-management strategies that collectively became known as demand-side management (DSM). These were the Energy Policy and Conservation Act of 1975 (EPCA), the Energy Conservation and Production Act of 1976 (ECPA), and the National Energy Conservation Policy Act of 1978 (NECPA). Also starting in the ‘70s, as state regulators began increasingly scrutinizing the cost-effectiveness of new capacity investments brought before them by regulated utilities requesting cost recovery plus a profit, the concept of “least-cost planning” was born. Least-cost planning asserted that it was often more cost-effective to help customers reduce their energy demand through more efficient technology and better energy management practices than to build new power plants. 1 For an excellent history of the rise of demand-side management and least-cost planning in electric utility regulatory policy, see Joseph Eto, 1996: The Past, Present, and Future of U.S. Demand-Side Management Programs. LBNL-39931. Berkeley, CA: Lawrence Berkeley National Laboratory. Where Does U.S. Energy Come From?