Turning Policy Into Performance: Accounting for Policy in Cost-Benefit Analysis - Two Examples

Welcome to the newest installment of a new blog series called Turning Policy into Performance. In this series, we'll take a look at how states can implement decarbonization and climate goals with energy efficiency programs.

Cost-benefit analyses are an important step in evaluating energy efficiency programs because they ensure that ratepayer dollars provide benefits for customers, the utility system, and society at large. (See NEEP’s webinar to learn more) Yet it is common practice to see these tests only include metrics that reflect energy impacts from utility or participant perspective. This ignores the societal and participant non-energy benefits these programs provide, such as comfort, improved air quality, and economic growth. Without updating cost-benefit analyses to reflect state goals, states will miss out on cost-effective opportunities to produce programs that not only lower energy use but also accomplish climate and equity goals. One way to tackle this issue is through adoption of a jurisdiction-specific test.

What is a Jurisdiction-Specific Test?

A jurisdiction-specific test (JST) is different than current standard tests because it is unique to a jurisdiction or state, and includes metrics based on legislative and regulatory policy priorities. It does this by using a public stakeholder process that takes inventory of all applicable policies within a jurisdiction. By inventorying policies as the first step, the test is able to create a cost-benefit analysis that builds on the priorities of a jurisdiction, whether they be climate, energy, or societal impacts. To see more about the process to adopt a JST, see the National Standard Practice Manual for Benefit-Cost Analysis of Distributed Energy Resources (NSPM), which provides a five-part step-by-step process to create a jurisdiction-specific test and additional guidance on metrics and values.

Maryland and Connecticut both used the NSPM to create their jurisdiction-specific tests. Connecticut’s new test, the Connecticut Efficiency Test, includes metrics to account for state policies and goals around energy affordability and decarbonization. While Maryland’s new test, Maryland Jurisdiction-Specific Test, includes metrics to account for state policies and goals around equity, health and safety, and decarbonization.

The Connecticut Efficiency Test (CTET)

In April of 2022, CT DEEP released the Draft Determination for the 2022-2024 C&LM Plan, which contains proposed changes to better align the state’s energy efficiency plan, the 2022 – 2024 Conservation and Load Management Plan (C&LM), with equity, decarbonization, and energy affordability goals of the state. One of the changes proposed was creation of a new jurisdiction-specific test, the Connecticut Efficiency Test (CTET). Adoption of the CTET was part of a multi-year stakeholder process in which CT DEEP followed the steps outlined in the NSPM. The CTET includes three metrics to better align the cost-benefit analysis with state priorities of decarbonization and energy affordability. Below is an overview of each metric:

• Oil and Propane Savings to Align with Decarbonization Policies: The CTET includes costs and savings of other fuels (oil and propane). These metrics are important because cost-benefit analysis usually only account for electric or gas savings, but energy efficiency programs can lower oil and propane use when designed to do so. Additionally, including metrics that measure oil and propane savings can encourage fuel switching and electrification as they are able to account for the full range of benefits that stem from measures like replacing an oil-based heating system with heat pumps.
• Carbon Emissions to Align with Decarbonization Policies: The CTET proposed using a metric to account for the cost of carbon emissions, either the societal costs of carbon or an avoided compliance cost tied the state’s climate law. Both of these metrics can properly value the costs of emitting pollutants by quantifying economic and environmental harms, which are typically unaccounted for in cost-benefit analysis.
• Utility System Benefits to Align with Energy Affordability Policies: The CTET includes utility system benefits such as reduced arrearages collections costs, debt write-offs, and/or administrative costs metrics to capture energy affordability. These metrics account for the fact that efficiency programs lower energy use which lowers energy bills and, over time, can reduce the probability of customers falling behind or defaulting. This benefit is particularly important with programs that target low-income customers. Additionally, these benefits flow to both the participant and all ratepayers because, over time, the costs of arrearages fall to all utility customers.

The Maryland Jurisdiction-Specific Test (MJST)

Maryland just completed a year-long Future Programming Working Group process to propose changes to its energy efficiency programs for the 2024–2026 cycle, known as EmPOWER. The working group’s final report was released in April 2022 and proposed a jurisdiction-specific test, the Maryland-Specific Societal Cost Test (MJST). To establish the MJST, the working group followed the steps outlined in the NSPM and identified metrics to include in the test to prioritize deeper savings, equity, and decarbonization policies. Below is an overview of each metric:

• Greenhouse Gas Emissions to Align with Climate Policies: The MJST includes the social cost of carbon and an upstream methane emissions factor to align with state climate policies. These emission metrics account for the climate and environment benefits that energy efficiency programs provide through reducing these two pollutants. This is especially important in Maryland as the state recently set some of the most ambitious climate goals in the country with the passage of the Climate Solutions Now Act of 2022.
• Low-Income Benefits Adder to Align with Equity Policy: The MJST includes a 20 percent adder to capture low-income benefits. While not a precise metric, an adder is able to account for the tangible benefits that flow to underserved participants and communities, without requiring additional studies to identify exact metrics. While not explicit, the inclusion of these types of metrics can help achieve equity policy by recognizing unique benefits of programs geared towards low-income residents and communities. In the Northeast, Vermont and New Jersey also use a low-income adder to encourage more equitable program design.
• Health and Safety Benefits Adder to Encourage Weatherization and Fuel Switching: The MJST also includes a 10 percent adder to capture health and safety non-energy benefits that energy efficiency programs provide to participants. Maryland has applied the metric specifically to home retrofit programs and non-electric-to-electric HVAC measures recognizing the additional benefits that these programs can provide by improving the building shell and switching to electric heat in the home.

Conclusion

Connecticut and Maryland are not the first states in the NEEP region to create a jurisdiction specific test. Other states in the Northeast with their own test include Maine, New Hampshire, and New Jersey. Additionally, other states in the region, including Massachusetts, Vermont, and New York, have modified their base test to accommodate state policy. To see more about each state’s cost-benefit analysis, see NEEP’s 2022 Regional Roundup.

To learn more about how to create a jurisdiction-specific test and how metrics can reflect policy priorities, join us at the NEEP Summit 2022 | ScalingUP. We will have a Deep Dive session with Julie Michals from E4theFuture who will work through the steps and issues that appear during the process to create a jurisdiction-specific test.