Turning Policy into Performance: Carbon Metrics to Achieve Climate Policy

This is the second 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

.Achieving carbon goals set by states will require action across all industries. For energy efficiency, this requires a paradigm shift in program planning – away from energy savings and towards carbon savings. This shift needs to be represented in nearly every step of the energy efficiency planning process, and especially when: 1) establishing goals, 2) identifying inputs to cost-benefit calculations, and 3) designing performance incentives. These metrics can drive program design by signaling to utilities, program administrators, and other parties how to align their portfolios with state climate policy.

Across the country, policymakers have begun to take steps to leverage energy efficiency program success to achieve carbon reduction goals. This blog takes you through three steps in the energy efficiency portfolio planning process outlined above and highlights best practices for introducing carbon metrics. While there is no one-size-fits-all approach, there are various paths for any state – no matter its climate targets and energy plans – to embed carbon reduction goals into their energy efficiency portfolio.

Portfolio Goals and Carbon Metrics

Typically, energy efficiency program savings goals focus on first-year or near-term energy savings because this approach makes it easier to describe, measure, and plan programs in short cycles. But this way of implementation can unintentionally favor measures with high first-year savings that are unlikely to continue to deliver savings over the long term. Below are four metrics that states can use to incorporate climate and decarbonization policy into program goals and drive programs to deliver more savings over the long-term.

• Greenhouse Gas Emissions (GHG) Goal. If state policy is to lower GHG emissions, the clearest step to enact this in energy policy is to use GHG emissions as the goal. When program administrators know that the goal is to lower the use of GHG and not energy, they design programs differently, innovate, and find ways to deliver these savings.

• Total System Benefit (TSB) Goal. This goal is a dollar value that calculates savings and load shape of an energy efficiency resource by applying hourly values for energy, capacity, and GHG compliance costs. The California PUC has adopted this metric due to its ability to target “high value” load reduction and longer-duration energy savings while being fuel agnostic. The CA PUC recognized that GHG and fuel-neutral goals alone, while good for policy, did not capture the full benefits of energy efficiency programs (energy and capacity savings plus GHG reduction). Because it uses very granular data, the TSB can identify costs and benefits of programs that lower energy when the grid is the most carbon intensive.

• Lifetime Savings Goal. This metric does not directly account for carbon, but shifts energy efficiency to focus on long-term energy savings and can serve as an intermediary step if a state and regulatory commission is not ready to change the goal structure completely. Further, this metric can encourage implementers to invest in more long-term savings measures, which will help states as they look to lower carbon and energy consumption more permanently.

• Fuel Neutral Savings Goal. This goal, similar to lifetime savings, does not directly count or address carbon impacts, but shifts the implementation framework for energy efficiency programs. Current energy efficiency programs are classified as electric or gas programs, with targets defined as either gas or electric savings. To complete a transition to a carbon free or carbon neutral grid, states will need to lower consumption of all fuels and convert a majority of end uses to electric. Fuel-neutral targets (often measured in MMBtu) properly account for fuel usage in both electric and gas power, and allow utilities to claim savings for fossil fuel-powered end uses that are converted to electric.

Cost-Benefit Tests and Carbon Metrics

Cost-benefit tests inventory all costs and benefits of programs, but they often account only for utility costs and energy savings. Properly valuing energy efficiency programs and measures necessitates adding metrics to capture the impact of carbon emissions and other societal impacts that stem from emitting carbon. Metrics to measure carbon in cost-benefit analysis can take many forms, giving states the opportunity to value what they feel is important for their energy and climate goals. Below are three emerging trends in this area.

• Measuring energy with a fuel-neutral metric: Similar to setting a fuel-neutral goal, states can incorporate a fuel-neutral metric into the cost-benefit analysis. Incorporating this metric into cost-benefit tests allows for regulators to see the costs and benefits of all measures – electric or gas – when evaluating portfolios. One test for all fuels allows for a better comparison across fuels and programs goals, so that focus can be on cost-effectiveness.

• Accounting for the costs of climate air emissions: Similar to setting a GHG goal, accounting for climate air emissions puts policy directly into the energy efficiency planning process. Climate goals are created because the costs of continuing to emit carbon and other emissions is too high. States can put the costs of emitting or not emitting these sources directly into their cost-benefit analysis. Metrics such as Societal Costs and Benefits of carbon, methane, and other emissions properly value the costs of emitting pollutants by quantifying economic and environmental harms.

• Accounting for the costs of real time energy generation: Similar to the Total Systems Benefit goal described above, this metric puts a price on real-time energy generation. Another aspect of lowering carbon use is identifying when energy is needed and how it is generated. For example, one of the barriers to lowering carbon on the grid is being able to provide enough energy at peak demand time. Peak demand is the time when it is assumed the most demand will be on the grid. Current practice to meet this challenge is to build out and use all power plants, but there are other ways to provide adequate energy capacity. Planners can drive down energy usage through strategic energy management or displacing demand with energy storage, as long as the correct tools and price signals are in place. States can utilize loadshapes to inform energy planning analysis and start to fully capture the value of a flexible grid. To see more on this tool, check out NEEP’s End Use Load Profile (EULP) Priority Research and Data Recommendations.

Performance Incentive Mechanisms and Carbon Metrics

Performance incentive mechanisms (PIMs) or performance based rates (PBRs) work to place energy efficiency and clean energy investment on the same financial footing as pipes and wire investments by rewarding utilities for meeting policy priorities. Similar to the goals outlined above, these metrics are portfolio-wide, but utilities will receive a financial reward from achieving them. The metrics can encompass numerous areas outside of carbon reduction, depending on state needs, and can act as a tool to align utility business model with state climate goals. Recognizing the roles utilities can play in achieving climate policy, more states are offering financial incentives tied to metrics that measure carbon and encourage other state climate goals.

Incentivizing carbon reduction: States are just beginning to develop policies in this area. Hawaii is an example of a state that has implemented such an incentive. Through this structure, utilities can earn additional revenue by achieving performance in three areas: 1) interconnection, 2) low-to-moderate income energy efficiency, and 3) advanced metering infrastructure. Within each area, metrics are used to measure performance, one of which is GHG reduction. Starting with GHG or carbon as a sub-metric is also a meaningful way to gather data and other information needed to identify future incentives. Other states have passed performance incentive policies in legislation but are still enacting them in the regulatory space. For example:

• • Minnesota’s Energy Conservation and Optimization (ECO) Act, HF 164, allows for fuel-switching performance incentives for natural gas utilities but not electric utilities.
  • Oregon’s HB2021 requires retail electricity providers to reduce GHG emissions from the electricity sector 80 percent by 2030, 90 percent by 2035, and 100 percent by 2040 and allows for the use of performance incentives for early compliance.
  • Colorado’s Beneficial Electrification Program Bill, SB246, allows the commission to establish a performance incentive mechanism to encourage utilities to invest in beneficial electrification programs. 

How to measure carbon depends on many aspects of a state’s climate and energy efficiency policy. But one thing is for sure, there is a way to do it. So let’s start!