Second Annual Kentucky Energy Efficiency Conference
Tom FitzGerald, Director
Kentucky Resources Council, Inc.
November 16, 2007
II. Getting On the Same Page
We have reached an important point in Kentucky’s energy and utility policies. We stand with one foot in the past where adding value for the coal industry was the preeminent political concern, and the other in a carbon constrained future where accounting more honestly for the costs of our energy choices requires reevaluation of our production and utilization of energy and to invest in energy strategies and choices less damaging to the land, air and water of our Commonwealth, and more capable of sustaining an economy and quality of life over the long term.
There is general consensus within the scientific community that emissions of greenhouse gases should be reduced by 60-80% by mid-century to minimize irreversible effects of climate change. There is also general consensus that we have a relatively brief period in which to restructure the manner in which we produce and consume energy, before the exigencies of climate change will impose dramatic costs on our communities and our economy and narrow our options to mitigate, rather than adapt, to climate change.
And while we recently hit an embarrassing pothole on the road to planning for a carbon-constrained future, conferences such as this provide an opportunity for critical dialogue, better understanding of the interests and needs of each constituency, and for consensus-building.
The economic implications for Kentucky of the coming national carbon mandate such as that proposed in the Warner – Lieberman bill or several others now pending before Congress, will be significant. As a state that both produces a significant amount of coal and which is almost entirely dependent on coal and other fossil fuels for electricity, Kentucky ratepayers could see significant increases in electric rates as utilities seek to recover costs associated with reduction in carbon emissions or internalization of carbon costs. The sticker shock, and the potential adverse effects on the most vulnerable ratepayers and on our economy, if we fail to plan now and to invest now in a strategy to reduce carbon emissions from the combustion of coal for electricity through efficiency improvements and diversification of sources, will be staggering.
Just as the overwhelming weight of the scientific community acknowledges climate change as a phenomenon, there is growing consensus in the business community and in local governments as well as Congress on the need to reduce greenhouse gases. The General Assembly as a body has begun to understand and acknowledge that there will be a national policy response to climate change and specifically, towards a mandatory program of controls on emissions of greenhouse gases from fossil fuel utilization. While the incentives in HB 1 were lopsided in the wrong direction, the General Assembly took several positive steps towards a rational energy future, commissioning a report on carbon emissions, research and strategies that is due at the end of this month, called for development of a center for renewable energy and energy efficiency intended to parallel the center for applied energy research, and requested a study on reform in utility regulatory policy.
We do the public, and particularly those I represent who have underwritten our so-called “cheap” coal-fired electricity and who are least able to withstand increases in electricity rates, a great disservice by failing to acknowledge that national action to reduce carbon emissions is a virtual certainty within the next few years, and that what has historically been our strength is, in a carbon-constrained future, our great vulnerability. The time has come to make our top energy priority real and sustained investment in energy efficiency to allow deferral of new base-load plant construction and diversifying our energy portfolio to reduce the dependence on coal-fired power.
If we act prudently, there are opportunities for the Commonwealth both to mitigate the impact of the carbon mandate, and to retool our economy for a carbon-constrained world. The most important area in which state investment could help hedge against the near-term impacts of a mandatory carbon reduction program is energy efficiency. Investment in improving efficiency of conversion and use of energy offers a way to “mine” inefficiencies in the way that power is generated and consumed and to buy important time as the framework of the carbon mandate is constructed and as technological improvements in the capture, conversion and management of various fuels are refined.
III. Questions Asked
The first question that we were asked to address is whether utilities have been successful in implementing energy efficiency in Kentucky, and in what ways or areas are improvements most needed?
Perhaps the best way to answer this question is to provide a snapshot of energy rates and use.
Kentucky’s electricity rates remain relatively low-cost, but our bills certainly are not, because we consume power inefficiently. The EIA, which is much better at predicting the past than the future, provides this information based on 2005 statistics: In 2005, there were 20 states with lower monthly residential electricity bills than Kentucky’s. In that year, Kentucky’s residential ratepayers consumed more electricity than our counterparts in 43 other states; our businesses, more than 19 other states and our industries, more than counterparts in 47 other states.
Kentucky’s utilities have taken steps to encourage efficiency, but there is a tremendous untapped potential in all sectors for greater efficiency. According to the August 2007 report from the Kentucky Pollution Prevention Center and American Council for an Energy-Efficient Economy, prepared for the Governor’ Office of Energy Policy, titled An Overview of Kentucky’s Energy Consumption and Energy Efficiency Potential, improved energy efficiency could meet all of the growth in energy demand predicted for Kentucky by 2017, saving the equivalent of the power that three 500-megawatt power plants would generate over a 10-year period at a cumulative savings for Kentucky of 6.8 billion dollars.
Efficiency improvements are a key to creating a sustainable Kentucky economy, and to generate good jobs, increase disposable income, keep money circulating in the state, and make our industries and products more cost-competitive in the world market.
The second question we were asked is whether we have recommendations for regulatory or legislative changes that would provide a good environment for utilities and their customers to pursue more energy efficiency in Kentucky.
The General Assembly has commissioned from the Public Service Commission a report on recommendations by July 1, 2008. The PSC study is important in reframing the question of how we address energy need. I would hope that the regulated electric and gas utilities as well as the municipals and TVA, actively engage in this study process. Among the areas in which the General Assembly has requested recommendations on actions are those to:
Eliminate impediments to requiring utilities to adopt demand management strategies prior to Commission consideration of any proposal to increase generating capacity.
Electric utilities are shifting to a build mode as their reflexive response to address increasing demand. But now is not the time to build new coal-fired baseload plants. Until a utility has demonstrated that all cost-effective DSM strategies have been deployed, including investment in energy efficiency, no new coal-fired capacity should be approved. Energy efficiency investment, coupled with deployment of certain renewables, buy critical time and allow avoidance of risky investments in new coal-fired base load or expensive natural gas-fired supply before the carbon targets and timeframes are adopted.
Encourage diversification of energy portfolios through use of renewables and distributed generation and incorporate full-cost accounting that considers life-cycle energy, economic, health and environmental costs of various strategies for meeting future energy demand.
There is an opportunity to provide additional meaning and depth to resource planning, in order to better value and factor in efficiency, clean energy resources, and historic “externalities” that have a nasty way of eventually becoming internalized in less-efficient and more costly ways to the ratepayers, such as add-on adjustments. Utility resource planning processes that fully cost the fuel choices and energy approach in life-cycle terms will more honestly value fuel diversity, congestion relief, reliability enhancement, environmental and cost-savings benefits that clean energy and energy efficiency provide.
Modify rate structures and cost recovery to better align utility interests with consumer interests in efficiency and lowest life-cycle costs.
It is no secret that the natural gas utilities want to restructure the ratemaking process in order to allow greater recovery of their non-commodity costs and investment, since the declining commodity sales from more efficient use of the commodity and cost volatility have resulted in returns less than those allowed by the PSC. There are ways to restructure ratemaking policies to better align utility cost recovery with the delivery of cost-effective energy efficiency and to promote energy efficiency investments for consumers, but simply decoupling recovery from sales does not necessarily produce that investment in efficiency nor result in moderation of overall costs to consumers. As we look to replace the traditional ratemaking formula with a rate design that is not volumetric or sales-oriented but rather creates incentives for energy efficiency and conservation, we must assure that the most vulnerable consumers for whom there is little elasticity in demand are protected, that the incentives are available across the range of users and result in reduction of costs and moderation of cost increases, and that accountability to the PSC in the quality of management in the operation and maintenance of utilities remains, and that any reduction in the risk of non-recovery of costs is met with a commensurate reduction in the approved rate of return. We don’t write on a tabla raza, and have the cumulative experiences of a number of other states that have adopted various mechanisms, from partial and complete revenue decoupling to rate stabilization tariffs, and flat fees. Dialogue is critical to identifying the mechanism that best promotes the goals not only of the utility, but of all classes of consumers and of environmental sustainability.
In other areas, we need to tailor investments in energy efficiency by sector to respond to the utilization patterns. With almost half (42%) of residential energy use in space heating, significant expansion of home weatherization programs to include all housing stock, including rental properties, in order to increase efficiency and lower heating and cooling bills, is a wise and prudent investment priority. We spend millions of dollars in government and volunteer time and materials each year in attempts to weatherize housing stock, and in attempting to provide public subsidy for heating bills that consume a disproportionate share of low-income family income.
Yet we have no mechanism to align the interests of the rental property owners with the interests of their tenants in lowering bills. Provision of low- to –no-interest loans and other financial mechanisms to allow recovery of investments in and to encourage residential, commercial, institutional and industrial investments in retrofitting wiring, heating and cooling systems, insulation and other energy efficiency and renewable energy mechanisms for existing owner-occupied and rental structures and facilities, should be a priority.
Section 51 requests LRC staff to report on energy efficiency building and construction practices, including review of current building practices, and a study on improving tax incentives to encourage improvements in energy efficient building methods and components. The study is to be completed by November 2008. I hope that the Home Builders Association, and individual architects, builders, and equipment contractors will actively participate in identifying mechanisms to greatly enhance the efficiency of new and existing housing stock.
The General Assembly called for development of a plan for creating a “Center for Renewable Energy Research and Environmental Stewardship,” whose mission is to “provide leadership, research, support, and policy development in renewable energy, to advance the goal of sustainable energy and to promote technologies, practices, and programs that increase energy efficiency in energy utilization in homes, businesses, and public buildings.” Unfortunately, the planning collaborative did not solicit input and recommendations until late in the drafting stage, and does not appear to have considered the recommendations of the Task Force on Energy Efficiency, which included a number of consensus recommendations for energy efficiency, including full implementation and enforcement of building codes statewide and incentives for green building. The plan draft also focused narrowly on industrial energy use, failing to appreciate the significant savings and benefits in the residential, commercial and institutional sectors. I hope that the final plan will better incorporate stakeholder input and the legislative intent.
We need to establish a sustained stream of funding, through a public benefits fund or other mechanism(s) to enable needed investments in renewable energy, energy efficiency and energy conservation. Comparable investment in research and demonstration of renewables and energy efficiency for all sectors, including partnerships with business and industry to development a strategic plan in order to position our economy and our manufacturing base to accommodate and flourish in a carbon-constrained world. The ability and timing of the maturation of hybrid, fuel cell, and other technologies is not static, but is instead directly tied to the investment of funds and brainpower into addressing technical obstacles. Dollar for dollar, investment in coal-related research should be matched with investment in energy efficiency and deployment of renewables.
Our economic growth based on current energy utilization rates is not sustainable, and as the bill comes due in the forms of mercury, fine particulate, GHG and other emissions requirements, energy sources and strategies (including efficiencies) that have a lighter footprint and can provide and support a sustainable economy, should have a center focused on the advancement of those strategies. Our daunting task is to remain “competitive” in an economic environment where energy sources are more realistically “priced,” that is, where the life-cycle costs of production, transportation, utilization, and waste disposal (and particularly the costs of GHG emissions) are increasingly required to be internalized rather than shifted into the public domain. A sustained prioritization of efficiency in all sectors and in the conversion and utilization of energy, is critical to our success.