Break through

Strategic electrification – or the conversion of appliances and heating systems traditionally powered by fossil fuels to efficient electric alternatives – is a key piece in the decarbonization puzzle and is growing in interest among states and municipalities looking to reduce their carbon footprint. What differentiates strategic or beneficial electrification from “electrification” is that it must benefit the customer, environment, and distribution grid. On top of carbon benefits, strategic electrification has implications in a number of additional areas. It is a workforce development strategy, bringing new jobs to all points in the market chain, from engineers and system designers, to retail salesman and contractors. It also offers numerous economic and non-energy benefits such as reduced utility bills, and cleaner home air quality and quieter and smarter appliances.

Many states in the region have begun implementing strategic electrification programs to incentivize the adoption of electric vehicles, space and water heat pumps, and other appliances like induction stoves. However, many are held back from widespread support of the movement despite all of these benefits. There are three main policy-related hiccups that can prevent states from fully embracing strategic electrification: (1) the definition of what measures are considered “energy efficiency” measures, (2) restrictive energy reduction targets placed on utilities, and (3) outdated cost-effectiveness tests that don’t adequately value new distributed energy resources technologies and thus limit access to funding. Let’s go through them each and find solutions.

What’s an Energy Efficiency Measure?

What is an EE measure?

An energy efficiency measure is technology or behavioral changes that reduce energy consumption, such as replacing an incandescent 60W bulb with an equivalent 10W LED or replacing an old 70 percent efficient natural gas boiler with a modern 90 percent efficient one. These clearly reduce energy consumption. Strategic electrification is not so clear because these measures switch from one fuel source to electricity. The reduction you might see in fossil fuel usage results in an increase in electricity usage.

Thus, many efficiency programs cannot offer strategic electrification measures since they don’t fit the obvious energy reduction profile. The solution is to expand the legislative definition of “energy efficiency” to incorporate strategic electrification and other distributed energy resources. We saw this happen in Massachusetts with the passage of bill H.4857 “An Act to Advance Clean Energy” which expanded the definition of energy efficiency to include measures such as strategic electrification, energy storage, and demand response. Great! With strategic electrification now classified as an energy efficiency measure, let’s tackle the next barrier: utility savings targets.

A Closer Look at Energy Savings Targets

Most states in New England and the Mid-Atlantic require their utilities to achieve a specified amount of energy savings via energy efficiency programs. These savings are separated into fuel-specific categories – megawatts for electricity and therms for natural gas. A fuel switching program directly conflicts with these goals because they increase, not decrease, electricity consumption. The solution is to think holistically about energy and use a single all-fuel metric that captures total energy usage and savings no matter the fuel source.  Examples include heat energy metrics like British Thermal Units (BTUs), and greenhouse gas emissions metrics like tons of CO2 equivalent (tCO2e). The efficient electric systems offered in strategic electrification programs produce a net reduction in energy usage that becomes clear only when using an all-fuel metric. Massachusetts and New York both established BTU all-fuel metrics that allow utilities to realize savings from fuel-switching, including savings from unregulated fuels such as oil and propane, which until now have largely been missed. Other states in the region are discussing similar changes to their energy savings goals. With utilities now able to offer strategic electrification measures in energy efficiency programs without compromising their savings goals, let’s move on to the final hurdle: passing a cost effectiveness test to be eligible for ratepayer funding.

Is It Worth the Investment?

Ratepayer funding has become the bread and butter funding source for energy efficiency programs. It is a reliable and easy funding stream that utilities can access to support programs and encourage saving energy. In most states, before an energy efficiency measure can use this pool of money, it must first pass a cost-effectiveness test. For decades, the norm has been to use a test that weights the costs and benefits of a measure from the perspective of the utility or the service territory. However, these approaches struggle to adequately value new distributed energy resources such as electrification, demand response, and energy storage. The solution is to update the cost-effectiveness test to align with other state policy goals such as climate and public health and evaluate all relevant costs and benefits.

The National Standard Practice Manual for Distributed Energy Resources (NSPM for DERs), developed by the National Energy Screening Project, is a detailed policy-neutral and economically-sound guide that aids states in reevaluating their cost effectiveness test. The manual was released over the summer and builds on the 2017 NSPM for Energy Efficiency. The NSPM outlines eight principles to guide the development of a jurisdiction-specific test that uses a regulatory perspective to assess the cost effectiveness of DERs. Cost effectiveness tests should align with a state’s individual policy goals and assess all relevant impacts, both energy and non-energy. This could mean valuing carbon emissions and other pollution as well as health impacts to the consumer and to society as a whole.

Once adequately valued, strategic electrification measures are more likely to be deemed cost effective and able to unlock ratepayer funding. New Hampshire, and Rhode Island went through the NSPM process to revamp their tests and New Jersey and Connecticut are in the processes of doing so. Case studies on the process can be found here. New Hampshire will be implementing an energy optimization pilot beginning in 2021 that will investigate the cost effectiveness and impacts of cold climate air source heat pumps. Without an aligned cost effectiveness test, states have to look elsewhere for funding. These sources might include Regional Greenhouse Gas Initiative (RGGI) funds, forward capacity market funds, alternative portfolio standard funds, tax credits, and state budgets. 

Every state will encounter its own hurdle or combination of hurdles. For example, Massachusetts is able to access ratepayer funding for cold climate heat pumps without an updated cost effectiveness test, New Jersey is offering heat pump programs without adopting an all-fuel metric, and Connecticut and Maine rely fully or in part on alternative funding sources such as RGGI or the Forward Capacity Market. Every state is different, but at NEEP we are encouraged to see so many navigating their own political landscape and thinking strategically about the pathway of strategic electrification. NEEP is available to provide resources and best practices on establishing strategic electrification programs. 

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