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Kentucky Resources Council, PO Box 1070, Frankfort, KY 40602 Phone [502] 875-2428

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PO Box 1070, Frankfort, KY 40602  Phone 502.875.2428, Fax 502.875.2845

White Paper On A Possible "House Bill 3" Melding Energy Efficiency and Job Creation, Is Posted  Posted: December 22, 2008

WHITE PAPER FOR HOUSE BILL 3

I. HOUSING ENERGY EFFICIENCY & JOB CREATION INITIATIVE

According to the National Action Plan for Energy Efficiency, “[e]nergy efficiency on the order needed to meet 50 percent or more of expected growth for natural gas and electricity is available at a cost of less than half of new generation in many parts of the country.”

Goals:

Substantially reduce energy usage by improving efficiency of existing housing stock

Creating employment opportunities for skilled construction and manufacturing workers

Improving the quality of life and health of all Kentuckians, particularly those with fixed or low incomes

Increasing economic opportunities and tax revenues for local economies

Reducing carbon and other pollutant loading by increasing efficiency of use of fossil-fuel energy

Diversifying energy use to incorporate solar hot water, geothermal, and other renewable energy in residential housing stock

Align utility interest in increasing available power without constructing new capacity, with customer interest in reducing utility bills

Program Components:

A. Owner-Occupied Housing Retrofitting and Restoration

Access to capital for energy efficiency improvements is a barrier to many homeowners in installation of measures that would reduce electric and gas utility costs.

Eligible participants would include all customers of retail electric and natural gas suppliers who are owners of the dwellings that they occupy.

Under this program, the regulated utilities would be required to offer financing up to $15,000 for installation of qualified energy efficiency measures. Any interest charged on the financing would be below market, and below the approved rate of return due to the low risk of non-recovery. The details of the financing, including administrative costs, loan approval requirements, security, change in home ownership, and loan default consequences, will need to be developed by the PSC in an administrative case with input from all stakeholders.

Qualifying measures would potentially include:

Weatherization, ductwork sealing, Energy Star-rated heating, air conditioning and ventilation (HVAC) equipment, hot water systems, interior lighting, storm or replacement windows and doors Energy-efficient heating, cooling, ventilation or hot water systems, interior lighting systems, upgraded insulation, solar water heating systems, and any other efficiency measures that would reduce energy costs, including active or passive solar systems. The Energy and Environment Cabinet would develop a list of qualifying criteria for the equipment.

An audit, performed by the utility or by an entity unrelated to the equipment sales or installation company, would identify and rank the most cost-effective measures and the anticipated savings from the installation of such measures. The payback period for determining cost-effectiveness would be no longer than 20 years based on current utility rates and anticipated energy cost increases. Defining what is “cost-effective” is a critical issue, and should be defined to include both current costs and anticipated increases in energy costs in determining whether the proposed efficiency measure will yield appropriate savings to be considered cost-effective over the 20 year period.

In recognition that there are non-profit entities who have been working on weatherization for many years, including some CAAs, Project Warm, the Christian Appalachian Project, and others, some preference should be given to non-profit providers. To assure that the audits are properly performed on a “whole house” basis, the auditors would be required to be certified under the Home Performance With Energy Star program standards and would use a standard audit protocol such as the National Energy Audit (NEAT) that is currently used by the CAK Weatherization Program.

The utility would review and approve those measures selected by the homeowner, and would finance the installation of such measures. The cost of the financed installation would be amortized over a ten-year period, with a nominal interest rate and a portion of the savings from the installation of those measures equivalent to the lost fixed costs, as approved by the Public Service Commission, would be recaptured by the utility. Where the electricity and natural gas suppliers are distinct entities, the contribution of each to financing the measures would be shared and the return for lost fixed costs would be determined based on the distribution of the savings accrued in higher efficiency from the selected measures.

Preference would be given to local materials and local labor in retrofitting the structure, and to non-profit entities and firms that employ workers from Job Corps or similar programs. The Energy and Environment Cabinet would serve the gatekeeper function of qualifying firms and materials.

Utility participation in this program could be a component of satisfying a renewable/energy efficiency portfolio requirement.

Anticipated outcomes include significant local economic benefits, reduced utility bills and increased value to properties, improved health, lower carbon and other emissions, deferred necessity for development of new generation capacity.

B. Low-Income Owner-Occupied Housing Retrofit

Recognizing that even where the capital barriers are eliminated by allowing them to be amortized over a 10-year period, low-income households may not be able to afford the cost, a separate program would be developed to address the need to upgrade low-income owner-occupied housing stock. This program would build upon the DOE weatherization program currently managed by Community Action Kentucky and the work of NGOs such as the Christian Appalachian project and Project Warm, and would greatly expand the number of homes for which energy efficiency improvements could be funded. The CAK Weatherization program weatherized 2,255 homes in 2006-7, with an average reduction of their consumption by an average of 20%.

Eligible for this program would be owner-occupied homes whose households had incomes below 150% of the federal poverty guidelines, and Community Action Kentucky, working in conjunction with local Community Action Agencies would act as “gatekeepers” for intake and certifying eligibility. In addition to the LIHEAP program, Community Action Kentucky operates the low-income Department of Energy weatherization program in all 120 counties with 22 Community Action Agencies and Metro Louisville, which has the CAA in the same agency as housing. The costs of certifying eligibility would be reimbursed, with a reasonable percentage cap on administration costs.

A $50 million dollar bond would be issued, similar to that authorized in House Bill 2, but with certain important distinctions. $25 million would be available for this program.

In those communities where there exist non-profit organizations with demonstrated experience in rehabilitation of low-income structures for energy efficiency, those organizations will have the opportunity to develop and submit for approval RFP for managing the program within that community, either alone or in conjunction with the local CAA. The Finance and Administration Cabinet will review the RFP and award the program management to the program that demonstrates a history and capacity for delivery of rehabilitation services in a cost-effective manner. The qualifying homeowner would have an audit performed by the Community Action Agency or through the CAA by the utility or a qualified third-party, identifying cost-effective energy efficiency measures (those identified above). The local Community Action Agency (or non-profit managing the program, as per the paragraph above) would develop a plan for installation of such measures and preference would be given to use of local materials and local labor in retrofitting the structure, and to non-profit entities to firms that employ workers from Job Corps or similar programs, and to initiatives that offer opportunities for KCTCS students to participate as co-op students in the program. Currently, 15 of the 23 CAA agencies do the work with in-house crews, 3 agencies are a hybrid using some subcontracting, and five use primarily subcontractors. Those using subcontractors still have an in-house inspector and auditor.

Funds provided through this program would not be used to increase CAA staffing levels beyond that necessary to administer the program, since one of the goals of the program is to extend employment opportunities into the private sector to offset the decline in the new housing and manufacturing sectors.

A small portion of the savings would be recaptured to apply to the bonded debt service, and the remainder of the debt service would be retired by a nominal KwH charge on all Kentucky residential utility customers (regulated and municipal). The savings to the class of customers in “poverty” costs will be much more significant than the nominal charge, resulting in a savings to the customer class from lower cutoff rates, less brown bills, and deferred necessity for development of new energy supplies.

According to the MHC State of Metropolitan Housing Report 2008, citing Oak Ridge National Laboratory data and Oppenheim and MacGregor, investment in low-income energy efficiency programs is returned 7-fold in economic and social benefits, including savings to customers who then spend that money on other essential items, savings to other ratepayers in lower arrearages and shut-offs, saved moving costs, lower homelessness rates, saved uninsured medical costs and lost work, avoided fire damage, and other avoided costs. If all Americans lived in weatherized and energy efficient homes and had the income to pay their full share of utility bills, all other ratepayers would save nearly $6 billion in poverty costs.

For manufactured housing, where the provider determines that due to the condition of the housing, the application of energy efficiency measures to the dwelling will not be cost effective, the funds can be applied to acquisition of replacement housing that incorporates energy efficiency measures.

C. Rental Property Retrofit

With 475,000 rental units across the Commonwealth, the upgrading of rental housing stock is a significant energy efficiency concern, and a potential source for significant savings as well as improvement in the quality of the housing stock. The lowest-income households are typically rental units, and in many cases, the utility bills are much higher due to the lack of energy efficiency measures and the deteriorated condition of the housing stock. In Louisville, the Metro Districts with the highest concentration of rental units also have the highest poverty rates.

Under the pilot phase of this program, a forgiveable loan would be made through a local Housing Authority to any qualified Section 8 rental property and to HUD-qualified below-fair market rate rental units. The qualifying property owner would have an audit performed, either by the utility or a qualified third-party approved by the Housing Authority, identifying cost-effective energy efficiency measures (those identified above). The Housing Authority and utility would develop a plan for installation of such measures and preference would be given to local materials and local labor in retrofitting the structure, to non-profit entities and to contractors and businesses that employ workers from Job Corps or similar programs, and to initiatives that offer opportunities for KCTCS students to participate as co-op students in the program.

Funds provided through this program would not be used to increase agency staffing levels beyond that necessary to administer the program, since one of the goals of the program is to extend employment opportunities into the private sector to offset the decline in the new housing and manufacturing sectors.

In those communities where there are existing non-profit organizations with demonstrated experience in rehabilitation of low-income structures, those organizations will have the opportunity to develop an RFP for managing the program within that community, either alone or in conjunction with the local CAA. The Finance and Administration Cabinet will review the RFP and award the program management to the program that demonstrates a history and capacity for delivery of rehabilitation services in a cost-effective manner.

Funds would be loaned for installation of energy efficiency measures for single or multi-family units, up to a maximum of $15,000 for any unit. For each $1,000 loaned, the owner would make a one-year commitment to keep the unit as a Section 8 rental or below FMR rental unit, and would further commit that any increases in rent would be consistent with the average rental rate increase in the community and would not be raised due to the improvements. (Alternatively, a yearly cap could be imposed). Yearly certification would be required, and for each year, $1,000 of the loan would be conditionally forgiven. In the event that the landowner defaults, the entire loan amount would be due and a lien would be imposed for the remaining balance.

After a three-year period, the program would be available to all owners of rental properties. The specific guidelines for loan forgiveness would be developed by the Finance and Administration Cabinet.

A portion of the energy savings from the installation of these measures would be recaptured from the utility bills, and the remainder would be paid by the nominal KwH charge. Overall, the residential customer class will save significantly beyond the line charge in fewer “poverty costs” and in deferring the need for new generating capacity, as well as the improvement in the value of housing stock resulting in higher property tax assessments.

Additionally, the lowering of monthly utility bills would allow the LIHEAP funds to go further to addressing the need for utility assistance by low-income Kentuckians.

Under all of these programs, the Energy and Environment Cabinet will establish standards for energy efficiency in heating and cooling equipment, windows and doors, etc.

Each household that is provided funds under any of these three programs, would be enrolled in a time-of-day pricing program, would have a smart meter installed, and would receive training from the utility or from a qualified third-party provider, on how to modify energy usage patterns in order to reduce the cost of energy to that household. The smart meter would be located within the home and show the customer actual energy use in the moment, as well as kWH consumed for the month, and what the bill would have been under the traditional tariff.

II. CREATING PARITY IN INCENTIVES FOR RENEWABLE POWER

The Mother Ann Lee hydroelectric plant is an example of home-grown renewable energy. Other existing dams in Kentucky offer some 800 mW of untapped low-impact hydroelectric power. In order to help utilities meet diversification goals and to hedge against carbon requirements, Kentucky should place clean energy sources on level footing in extending tax credits.

The goal is to achieve parity with the coal tax credit under KRS 141.0405 and KRS 141.428. Since the coal tax credit is $2 per ton, and it takes roughly 1 pound of coal to produce 1 kWh, one ton of coal can produce roughly 2000 kWh or 2 MWH. Thus the coal credit is $2 for 2 MWH, or $1 per MWH, which corresponds to $0.001/kWh, which would be the tax credit offered to clean energy from low-impact hydro or other renewable energy. The starting point to qualify is an in-service date of Jan. 1, 2005, the exact same as 141.428 uses. A bill draft of this component is attached.

III. STABILIZING DEMAND THROUGH A RENEWABLE AND ENERGY EFFICIENCY PORTFOLIO STANDARD

Under development. An RPS requires a state’s electric utilities to meet a specified percentage of their electricity from renewable sources by a target date. Interim and longer-term target goals will be included, with separate target percentages for renewables and for energy efficiency. Utilities should be allowed to purchase or develop renewable energy from other states to meet the portfolio requirements.

A solar set-aside may be included. Eleven states include a ‘solar set-aside,’ specifying that a certain percentage of this renewable energy must come from solar electric (PV) or solar hot water systems. The solar set-asides are intended to catalyze rapid development of the solar industry in those states. Among the states with solar set-asides are North Carolina (0.2%), Maryland (2%), Delaware (2.005%), Pennsylvania (0.5%) and New Jersey (2.12%) (the figures reflect the percentage of the state’s total annual generation).

The use of solar set-asides demonstrates that other states have already established ambitious goals for deploying solar energy systems. For Kentucky to aim for achieving 1% of our electricity needs from solar PV and solar hot water would be ambitious but not unprecedented. It’s important to note that the states mentioned all have similar (or worse) solar energy resources as compared to Kentucky. If it can be done in Pennsylvania and North Carolina, it can be done in Kentucky.

IV. GIVING CUSTOMERS GREATER CONTROL OVER COST OF POWER

Within two years, each electric utility shall file with the Public Service Commission a tariff creating a voluntary program allowing customers to enroll in time of day pricing program, through which the utility will install equipment providing real-time cost information and allowing that customer to modify the pattern of electricity usage in order to lower cost (and assist the utility in flattening peak usage). During the two-year period, all members of the General Assembly and all constitutional officers shall have smart meters installed and shall be enrolled in the time-of-day program, unless those officials opt out of the pilot program. Within five years, all tariffs for residential customers shall be based on time of day pricing and smart meters shall be installed for all residential customers.

The smart meter would be located within the home and would show the customer actual energy use in the moment, the cost of that power, and kWH and cost of energy consumed for the day/month, in comparison to the cost under a traditional tariff.

V. UTILITY CONDITION OF SERVICE AMENDMENT

Within one year, all jurisdictional utilities shall amend their tariffs in order to include the authority of the utility to install load interrupters as a term of service for residential customers. Pilot programs have demonstrated that the temporary interruption of external air conditioning systems in order to avoid peak power purchasing or installation of new peak capacity, results in savings to the customers and allows the utility to defer construction of new capacity to address peak demand.

VI. REINTRODUCTION OF HJR 54 URGING COE STREAMLINING HYDRO PERMITTING REVIEW ON EXISTING DAMS

HJR 54, which was introduced but not passed in the 2008 General Assembly Regular Session, is a straightforward resolution encouraging the U.S. Army Corps of Engineers to promote private investment in installation of hydro plants on existing dams within and abutting Kentucky, by developing a memorandum of agreement among the federal and state agencies to prioritize and coordinate review of needed permits.

Installation of hydro projects is not for the faint of heart. Federal licensing is required from the Federal Energy Regulatory Commission, environmental studies are required as well, and a lease must be negotiated with the Corps of Engineers. Concerns of federal and state fish and wildlife and other agencies are also taken into account.

There is tremendous untapped potential in capturing the kinetic energy of water from these existing dams, with minimal environmental impact. By coordinating permit and license review, and by prioritizing review of applications for leasing, the Corps of Engineers could encourage greater private investment in harnessing the hydropower potential of the dams on our rivers to help meet energy demands.



Draft Renewable Parity Bill

A new section of KRS Chapter 141 to read as follows:

Renewable energy incentive tax credit incentive for electric power generation -- Definitions -- Tax credit -- Administrative regulations.

(1) There shall be allowed a nonrefundable credit against taxes imposed by the Commonwealth on any taxpayer that: (a) 1. Is an electric power company subject to tax under KRS 136.120; or 2. Is an entity that owns or operates a renewable energy electric generation facility. (b) Remits tax to the Commonwealth under KRS 136.070, 136.120, 141.020, 141.040, or 141.0401; and (c) The qualifying renewable energy facility is located within the Commonwealth of Kentucky and uses Kentucky resources for the generation of electricity.

(d) The renewable energy resource may be solar, wind, hydro, biomass, landfill gas, or municipal solid waste.

(e) Electricity generated by the renewable energy electric generation facility must be sold directly to retail customers or sold wholesale by the taxpayer to a utility for eventual sale to retail customers, or by a parent company of which the taxpayer is a wholly owned subsidiary. Electricity generated and consumed on the premises by the taxpayer is not eligible. (2) The amount of the allowable credit shall be one dollar ($1) per megawatt-hour (MWH) for each MWH produced and sold in the tax year. For facilities that use renewable resources for generation of electricity which are produced from both inside and outside the Commonwealth, only the portion of the renewable resource originating from inside Kentucky shall be eligible for the credit.

(3) A qualifying renewable energy electric generation facility must have been put in service on or after January 1, 2005.

(4) Corporations and pass-through entities subject to the tax imposed under KRS 141.040 or 141.0401 shall be eligible to apply, subject to the conditions imposed under this section, the approved credit against its liability for the taxes, in consecutive order as follows:

(a) The credit shall first be applied against both the tax imposed by KRS 141.0401 and the tax imposed by KRS 141.020 or 141.040, with the ordering of credits as provided in KRS 141.0205;

(b) The credit shall then be applied to the tax imposed by KRS 136.120. The credit shall meet the entirety of the taxpayer's liability under the first tax listed in consecutive order before applying any remaining credit to the next tax listed. The taxpayer's total liability under each preceding tax must be fully met before the remaining credit can be applied to the subsequent tax listed in consecutive order.

(5) If the taxpayer is a pass-through entity not subject to tax under KRS 141.040, the amount of approved credit shall be applied against the tax imposed by KRS 141.0401 at the entity level, and shall also be distributed to each partner, member, or shareholder based on the partner’s, member's, or shareholder's distributive share of the income of the pass-through entity. The credit shall be claimed in the same manner as specified in subsection (6) of this section. Each pass-through entity shall notify the Department of Revenue electronically of all partners, members, or shareholders who may claim any amount of the approved credit. Failure to provide information to the Department of Revenue in a manner prescribed by regulation may constitute the forfeiture of available credits to all partners, members, or shareholders associated with the pass-through entity.

(6) The taxpayer shall maintain all records associated with the credit for a period of five (5) years. (7) The Department of Revenue shall develop the forms required under this section, specifying the procedure for claiming the credit, and applying the credit against the taxpayer's liability in the order provided under subsections (4) and (5) of this section.

(8) This section shall be known as the Kentucky Renewable Energy Incentive Act.


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