IRP vs. EERS: There’s one clear winner among state energy efficiency policies

Blog Post | December 16, 2014 - 9:57 am
By Martin Kushler, Senior Fellow

With Ohio and Indiana having recently made major changes to their utility energy efficiency policy, and other states like Florida and Arizona considering it, this is an important time to review the evidence about the relative effectiveness of state policies designed to encourage cost-effective energy efficiency. States have embraced energy efficiency policies because the energy savings result in lower customer energy bills, investments in the local economy, improved reliability, and reduced emissions. But not all efficiency policies are equally effective at delivering results, so let’s take a closer look at two commonly touted policies for achieving energy efficiency as a utility system resource: integrated resource planning (IRP) and energy efficiency resource standards (EERS).

ACEEE has examined the relationship between these two widely utilized state energy efficiency policies and their outcomes on efficiency. The two key indicators we used to measure performance are spending on energy efficiency programs ($ as a percent of utility revenues) and annual electricity savings achieved (kWh as a percent of annual sales). We drew upon data on customer-funded energy efficiency programs from the recently released ACEEE State Energy Efficiency Scorecard and supplemented that data with information from Synapse and the Regulatory Assistance Project (RAP), and Pamela Morgan.

It is important to note that every state has a unique mix of circumstances and traditions, as well as a mix of particular individuals in leadership positions at utilities and state government. These factors influence the performance of energy efficiency policies in any particular state. Nevertheless, we believe it is instructive to look at how patterns of performance vary across many states under different policy conditions. These results will be presented and discussed in more detail in a report to be released early next year, but here are our top-line observations.

Integrated Resource Planning (IRP)

Twenty-eight states have a requirement for utilities to prepare IRPs, 10 states have some other type of long-term planning requirement, and 12 states have no IRP or planning requirement. Comparing IRP to no-IRP/planning states, there is no statistically significant difference in either energy efficiency program spending (1.64% of revenues vs. 1.50%) or savings (0.72% of sales vs. 0.48%). If the 10 states with other long-term planning requirements are included with the group of IRP states, the differences are slightly larger, but still not significantly different than the no-IRP/planning states (1.81% vs. 1.50% on spending, and 0.80% vs. 0.48% on savings).

Energy Efficiency Resource Standards (EERS)

By contrast, the differences for states with and without an EERS policy are striking. For the 2013 program year, a total of 26 states had EERS policies in place, while 24 did not. A very significant difference emerges between these two groups, with EERS states showing over three and a half times as much program spending (2.63% vs. 0.76%) and savings (1.11% vs. 0.30%) as the non-EERS states. These strong results from EERS are present whether or not the state has an IRP policy.

Looking just at states with an IRP or other long-term planning requirement, those that also had an EERS spent and saved over three times as much as states that had an IRP requirement but no EERS requirement (2.66% of revenues vs. .76%; and 1.16% of sales vs. 0.35%). For states without IRP/planning, those with EERS spent over 3 times as much (2.51% vs. 0.77%) and saved nearly five times as much (0.90% vs. 0.19%) as states with no IRP/planning requirement and no EERS.

Other policies supporting the use of energy efficiency as a utility system resource

We have also examined states that had policies in place for decoupling/lost revenue recovery and/or utility shareholder incentives for energy efficiency performance.

A total of 28 states had either decoupling or lost revenue adjustment mechanisms (LRAM) in place for at least one major electric utility, while 22 states had neither. There is a modest but not statistically significant advantage for decoupling/LRAM states on both energy efficiency spending (2.09% vs. 1.29%) and savings (0.85% vs. 0.56%).

Interestingly, if one compares the decoupling states to the LRAM states, there is a very significant difference, with decoupling states showing over four times the energy efficiency program spending (4.11% vs. 0.82%) and three times the savings (1.47% vs. 0.48%) of the LRAM states. However, this is likely influenced by the fact that 9 of the 10 decoupling states also had an EERS requirement, which is probably the dominant policy factor.

A total of 28 states had some type of utility shareholder incentives while 22 states did not. Again, there is a slight but not significant difference between the two groups on both energy efficiency spending (1.84% vs. 1.60%) and savings (0.83% vs. 0.58%).

Bottom line

Overall, the inescapable conclusion is that having an EERS is clearly the most effective state policy driving energy efficiency program spending and savings in the U.S. utility sector today. There is little evidence that IRP alone produces meaningful energy efficiency results in the absence of other strong policies. Other supportive policies, such as decoupling and shareholder incentives, appear to be helpful and are associated with modest increases in energy efficiency investments and savings. Yet, the most important value of such policies to date may not be their stand-alone effects, but rather, their ability to establish a fair utility business model that encourages utilities to accept and work toward achieving EERS efficiency targets—instead of seeking to block or overturn the EERS policy.

In a time when some state policymakers are becoming skittish about the concept of “mandates,” it is worth noting that the use of an EERS to set targets for cost-effective efficiency has been by far the most effective policy for achieving customer energy efficiency savings.

Patti Witte, an ACEEE consultant, assisted with the analyses for this blog post.