Energy Efficiency and Economic Development in New York, New Jersey, and Pennsylvania

Steven Nadel, Skip Laitner, Marshall Goldberg, Neal Elliott, John DeCicco, Howard Geller, and Robert Mowris

February, 1997

The purpose of this report is to better understand how additional investments in energy efficiency technologies can contribute to lower energy expenditures and new employment opportunities for residents of New York, New Jersey, and Pennsylvania, as well as generally strengthen economic activity and quality of life.

Energy is the lifeblood of the Mid-Atlantic economy. It provides light, heat, and air conditioning for homes, schools, and businesses. It is needed to power office equipment and high-tech production facilities, to transport both people and agricultural goods, and to support all aspects of the region's tourist industry. Energy is also a critical ingredient in many other goods consumed in the region ranging from medicines and children's toys to food, appliances, and automobiles.

However, energy that is used inefficiently will constrain the economy. High energy costs make the region's businesses less competitive and high energy bills reduce the amount of money the region's consumers can spend on goods and services. When money is spent on energy, much of it leaves the region and the nation. When money is spent on other goods and services, much more stays in the region, creating economic growth and jobs.

In spite of significant reductions in energy use and real energy prices in the past two decades, significant opportunities for cost-effective, energy-efficient investments exist in all sectors of the economy. Furthermore, many of these investments offer opportunities to improve product quality and productivity and lower operating and maintenance costs. Investments in energy-saving products and practices can lower energy bills for residents and businesses. Lower energy bills, in turn, will promote overall economic efficiency and create jobs in all of the states in the region. Investments in energy efficiency can increase cash flow and operating margins, providing businesses a critical competitive edge. Moreover, accelerated investments in energy efficiency will enhance the region's air quality by reducing emissions associated with energy production and use. Such investments will also help diversify the mix of energy resources available to homes and businesses, helping to ensure a stable and reliable resource base to meet future energy needs. Investments in energy efficiency can encourage the development of new, clean, energy-saving technologies and industries in the Mid-Atlantic region. Improvements in energy efficiency can also help protect the region against the impacts of possible new taxes on pollutants contributing to global climate change and other air quality problems.

In 1993, consumers in New York, New Jersey, and Pennsylvania spent approximately $70 billion to provide heat, light, power, and transportation for their homes, schools, and businesses, including approximately $30 billion in New York, $23 billion in Pennsylvania, and $16 billion in New Jersey. To put these totals in perspective, on a regional basis, energy bills are 15 percent higher than state tax collections. Many community and business leaders are looking for ways to use state tax dollars more efficiently. The size of each state's total energy bill suggests that Mid-Atlantic policy makers may also want to explore ways to use energy more efficiently.

This report examines the current energy consumption patterns and expenditures within each of the states and the regional economy. It projects what "business-as-usual" or "baseline" energy patterns might look like through the year 2010. These findings suggest that by 2010 the region as a whole will be approximately 7 percent more efficient in how much energy it uses to support a dollar of economic activity (compared to 1993 as measured by Gross State Product [GSP]) due primarily to the fact that new equipment and buildings are generally more efficient than aging equipment and facilities that will be replaced over the next decade. But the findings also show that total energy consumption will increase by 21 percent as a result of a growing economy.

The study then develops two high-efficiency scenarios (one for total energy consumption and one for electricity consumption only) for the region through the year 2010. These high-efficiency scenarios are based upon detailed analysis of energy efficiency potential in buildings in the residential, commercial, and industrial sectors as well as efficiency improvements in light duty vehicles in the transportation sector. The analysis provides estimates of the investments needed to achieve these additional energy savings as well as the resulting economic and environmental benefits.

The findings of the study show that by 2010, cost-effective investments in energy efficiency in the three Mid-Atlantic states can:

• Reduce energy use in the region by more than 20 percent, reducing consumer and business energy bills by more than $150 billion cumulatively over the 1997-2010 period;

• Create 164,000 jobs in the region; and

• Reduce emissions of critical air pollutants by up to 24 percent, helping to improve environmental quality.

In other words, the untapped potential for energy efficiency represents a critical economic development and environmental protection strategy for the Mid-Atlantic states. Increased investments in energy efficiency are an important step toward promoting a sustainable energy future for the Mid-Atlantic region. More specific findings of the report include:

• Cost-effective investments in energy-efficient technologies can reduce regional energy use by 24 percent in 2010 relative to the baseline, including 33 percent reductions in electricity use and 20 percent in fossil and other fuels outside of the utility sector.

• The additional investment in energy efficiency will increase the Mid-Atlantic region's employment base — from a net increase of 24,600 jobs in the year 2000 to a net increase of 164,300 jobs by the year 2010. The rise in employment, driven largely by the spending of energy bill savings, is equivalent to the number of jobs supported by the expansion or relocation of 1,095 small manufacturing plants in Mid-Atlantic region. Wage and salary compensation would similarly rise by a net of $3.5 billion by 2010 (in 1993 dollars), the equivalent of tourist expenditures from approximately 16.9 million visitor days.

• As a result of these additional energy savings, Mid-Atlantic ratepayers would enjoy cumulative energy bill savings of $153 billion over the 1997-2010 period. The high-efficiency scenario will require a $66 billion cumulative investment over the same period of time. This relatively small level of investment (less than 1 percent of the region's cumulative GSP over the period) can be achieved by redirecting a small portion of other investments toward productive energy investments. Only a small portion of these investments will be financed by government or through electricity rates; the vast majority of funds will come from homeowners and businesses making cost-effective investments in their homes and facilities. With all values in 1993 dollars, the energy efficiency scenario generates a positive benefit-cost ratio of 2.35 over the 14-year period of analysis. But even this value understates the cost effectiveness of the energy savings investments since the energy savings and environmental benefits will continue for many years after the year 2010.

• Under the baseline projections, the regional economy — represented by the change in GSP — will grow from $1,022 billion in 1993 to $1,327 billion in 2010 (measured in constant 1993 dollars). Under the high-efficiency scenario, the regional economy will grow an additional $612 million in 2010.

• The alternative energy strategy would have a positive benefit for the region's air quality as well. Carbon dioxide emissions, which contribute to global climate change, would be reduced by 161 million short tons in 2010, a 29 percent decline over baseline 2010 emissions. Energy-related pollutants such as sulfur and nitrogen oxides would decline by over 400 thousand short tons in the year 2010, also providing significant reductions over the baseline use.

Many of these findings are illustrated in Table ES-1.

However, achieving these benefits will not be easy. Policy makers and business leaders will need to play an active role in helping to develop and implement a series of initiatives to make the high-efficiency scenario a reality. The types of actions that will be needed include:

• Strong policies to make sure that energy efficiency services play a major role in a restructured utility industry — including establishment of a public benefit charge to fund energy efficiency, low-income, and other public benefit programs — and structuring remaining regulatory authority over distribution utilities so that these utilities have incentives to pursue cost-effective investments in energy efficiency;
• State-of-the-art building energy codes plus training and support for the effective implementation of residential and commercial building codes;

• Additional policies to improve the efficiency of the buildings sector, such as home energy rating and energy-efficient mortgage programs and equipment efficiency standards;

• Expanded technical and financial support to accelerate energy and process efficiency improvements in the industrial sector;

• Policies that improve the fuel economy of cars and light trucks, such as variable state taxes on new vehicles based on fuel economy and purchase of ‘best in class" vehicles for state fleets; and

• Creation of Sustainable Energy Development Agencies in New Jersey and Pennsylvania that would complement the New York State Energy Research and Development Authority and fund research and development (R&D), demonstration, economic development, and promotion activities in support of energy efficiency and renewable energy implementation.

As a first step, in 1997 officials in all three states will have opportunities to implement the first two actions.

Specifically, in New York and New Jersey, regulations and legislation are now being developed to restructure the electric utility industry. Regulatory proposals in both states propose to establish small public benefit charges to fund energy efficiency, renewable energy, low-income and research and development programs. These proposals are a good start but can be improved by increasing funding to the level of 1993-94 programs in New York (approximately $250 million per year for energy efficiency programs statewide), and to an equivalent level per kWh in New Jersey (approximately $150 million for energy efficiency programs). In other words, recent budget cuts made by New York utilities to prepare for restructuring should not be sustained once restructuring takes place. In Pennsylvania, restructuring legislation passed last year includes a small "universal service" fund for special programs for low-income households and includes energy efficiency programs among the list of permitted services. This universal service fund could be expanded to include energy efficiency programs for other residential customers as well as small commercial and industrial firms. Alternatively, as part of future utility commission proceedings on how to regulate distribution companies following restructuring, expanded energy efficiency programs should be explicitly addressed. Experience in other countries where restructuring has taken place indicates that following restructuring, market-based energy efficiency services for homes and small businesses are practically nonexistent and thus government must play a role to ensure that these services are provided.

In addition, in 1997 all three states will likely be deciding on future regulatory structures for distribution companies. All three states are considering price cap regulation. As part of such regulation, it is important to modify the basic price cap so that distribution companies have incentives to reduce costs but do not have incentives to build sales. If improperly structured, price caps will give distribution companies a profit incentive to build loads and scuttle energy efficiency efforts. Likewise, all three states should direct distribution companies to periodically prepare resource plans that examine investment and contracting needs over the short- and medium-terms and identify cost-effective ways energy efficiency programs and distributed utility resources can help defer future distribution system investments and meet future resource needs (for customers who continue to use the distribution utility to procure generation services). These distributed utility plans will be simpler and shorter term than the Integrated Resource Plans previously prepared by many vertically integrated monopoly utilities. The New Jersey Board of Public Utilities (BPU) draft Energy Master Plan includes the nucleus of such a distribution-utility planning effort.

Similarly, in 1997 the New Jersey Department of Consumer Affairs (DCA) and the Pennsylvania legislature will consider adoption of the 1996 Building Officials and Code Administrators International, Inc. (BOCA) Building Code that incorporates the 1995 version of the national Model Energy Code. Pennsylvania's energy code and New Jersey's residential energy code are based on national model codes developed nearly 20 years ago. Changes in energy-saving technologies and energy prices over the past two decades justify updating these codes. More than half the states in the United States, including New York, have adopted updated energy codes based on the 1992 and subsequent versions of the national Model Energy Code (or their equivalent). Costs of meeting these codes are relatively modest and the benefits in terms of lower energy bills over the lifetime of new homes and buildings are many times greater than the costs. Legislation adopting the 1996 BOCA code was adopted by the Pennsylvania House of Representatives in 1996 but died in the Senate at the end of the session. Both the House and Senate should pass this legislation in 1997. In New Jersey, DCA is planning to adopt the 1996 BOCA code but is considering whether to delete the latest energy provisions from this code, leaving the New Jersey residential energy code at approximately 1980 levels. This would be a major mistake — experience in other states amply demonstrates that modern energy codes are both workable and cost effective.

Thus, 1997 finds all three states at a critical crossroad — whether to make energy efficiency an important component of electric industry restructuring and building code efforts, or whether to pass up the valuable benefits such policies can provide. Failure to take the critical steps outlined above will put the region on a course under which critical economic development and environmental protection benefits will be lost. But by taking these actions this year, regional leaders will be laying a strong foundation for saving their citizens and businesses billions of dollars annually while creating thousands upon thousands of jobs.

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130 pps., 1997, $25.00, E971