Energy efficiency programs are largely paid for by ratepayers in the form of a small fee on their bills or a small amount embedded in their rates (an “energy efficiency fee” for purposes of this paper). These fees are then aggregated to fund cost-effective energy efficiency programs and projects across all sectors. Self-direct programs allow some customers, usually large industrial or commercial ones, to “self-direct” those fees directly into energy efficiency investments in their facilities instead of into a broader aggregated pool of funds. Opt-out programs, on the other hand, allow large customers to fully opt out of paying their energy efficiency fees with no corresponding obligation to make energy efficiency investments on their own. While self-direct programs can be, if properly structured, effective tools to capture industrial energy efficiency, opt-out programs are never appropriate policy tools for doing so.
Like other utility system resources, energy efficiency is a resource that can benefit all users and is paid for by all users. However, many states do not fully treat efficiency as a resource but rather as a customer benefit. Against this backdrop, some industrial and large commercial customers have contended that they should not have to pay energy efficiency fees. Their reasoning includes four main perceptions: (1) program offerings do not meet their needs; (2) energy efficiency fees are sometimes subjected to “legislative raids,” in which lawmakers co-opt the funds to cover budget deficits; (3) their payment of the fees subsidizes other customer classes; and (4) as a matter of business practice, they will invest in all cost-effective energy efficiency for their facilities on their own anyway, and so paying for programs is unnecessary. For more information on these claims, see Chittum (2011).
Due in large part to these concerns being expressed by industrial customers, many states developed self-direct and opt-out provisions. Of the 41 states in the United States that have energy efficiency fees, 24 have some sort of self-direct or opt-out provision in place. While opt-out programs allow a customer to avoid paying their energy efficiency fee entirely, with no requirement that energy efficiency investments are made in exchange, self-direct programs typically at least assume or require that customers make their own energy efficiency investments in exchange for an exemption of or credit against their energy efficiency fees. Self-direct program administrators often employ at least minimal efforts to measure and verify energy efficiency savings.
Unfortunately, most of these self-direct programs, and all of the opt-out programs, are not structured to maximize cost-effective energy efficiency and ensure that retained energy efficiency fees are used in a manner that benefits all users of a given public utility system. Opt-out and poorly structured self-direct programs cannot claim with certainty that they are achieving energy efficiency investments equal to that which would have been achieved had the customers remained within traditional energy efficiency programming, or that the industrial customer is being well-served by the program. Neither can they claim that the industrial efficiency investments are cost-effective.
Fortunately, self-direct programs can be structured to yield cost-effective energy efficiency savings and truly yield a public good of greater energy efficiency. In some particular cases, well-structured self-direct programs can offer certain tools and a level of flexibility that helps overcome long-standing barriers to greater energy efficiency in the industrial sector. When coupled with strong oversight and extensive measurement and verification of claimed savings, these programs can serve an entire public utility system very well. Specific examples of such programs are discussed later in this paper.
States that do treat energy efficiency as a resource understand that energy efficiency is a resource that benefits all users, so energy efficiency deployed anywhere in a system benefits everyone, regardless of where the actual energy efficiency investment was made. The industrial sector offers some of the most cost-effective energy efficiency available, and states that work to capture that potential (through programs funded by energy efficiency fees, self-direct programs, or a combination of both) are best positioned to provide their energy users with the benefits of increased industrial energy efficiency.
Allowing large customers to opt out of energy efficiency fees and programs or self-direct their funds without substantial oversight by regulators or adherence to cost-effectiveness tests, as is found in programs around the country, is unfair to other customers who would benefit from cost-effective energy efficiency investments made anywhere in the system. It is critical, then, that state regulators and policymakers, as representatives working on behalf of all of the state’s residents, work to develop offerings to large energy consumers that are still fair to all other classes of customers.
Chittum, Anna, R. Neal Elliott and Nate Kaufman. 2009. Industrial Energy Efficiency Programs: Identifying Today’s Leaders and Tomorrow’s Needs. Report IE091. http://aceee.org/research-report/ie091. Washington, D.C.: American Council for an Energy-Efficient Economy.