Energy Efficiency as an Economic Engine and Environmental Solution for Massachusetts

Tuesday, January 17, 2012

By Jeremy McDiarmid, Danah Tench, and Sam Krasnow
Click here for authors' bios.

The Green Communities Act of 2008 (GCA) Background

On October 20, 2011, the American Council for an Energy-Efficient Economy (ACEEE)[i] announced that Massachusetts earned the #1 ranking in the country in its annual State Energy Efficiency Scorecard (Scorecard).[ii]  The Scorecard presents a comprehensive ranking of states based on an array of metrics that capture best practices and recognize leadership in energy efficiency policy and program implementation, benchmarks progress and provides a roadmap for states to advance energy efficiency in the residential, commercial, industrial, and transportation sectors.[iii] 

This ranking serves as additional independent recognition of the successful policy course set by the Green Communities Act (the “GCA”) of 2008.[iv]  The GCA is a forward-thinking set of energy reform policies that continue to shape our state’s energy policy and strategy.  This brief article discusses one key aspect of the legislation — a shift in how the state approaches energy efficiency that is widely supported by diverse stakeholders including large and small businesses, environmental groups, utilities, investors, and consumer and low-income advocates.  At its core, the efficiency provisions in the GCA require our state’s utilities and municipal aggregators to treat energy efficiency as an energy resource alongside traditional electricity and natural gas supply — and to do so on an economic basis.  The GCA requires utilities to buy all energy efficiency resources that are cheaper than additional electric and natural gas supply.  As further discussed below, this simple, cost-saving principle has led to significant increases in low-cost efficiency investments, consumer savings, and job creation over the past three years.  In addition, it has put Massachusetts on track to defend its new #1 efficiency ranking and reap huge economic and environmental benefits for decades to come. 

How the GCA Works

Prior to the GCA, Massachusetts’ approach to energy efficiency led to severe underinvestment in low-cost energy efficiency resources.  In 2008 for example, Massachusetts consumers spent about $6 billion on electricity supply that cost $100 per MWh (or 10¢ per kWh) to run our factories, businesses and homes.  However, in the same year the state only invested $125 million in electric energy efficiency programs that would reduce the cost of electricity by just $30 per MWh saved (or 3¢ per kWh saved).  As shown in the figure below, Massachusetts was failing to invest adequately in our cheapest energy resource.  

Figure 1: Massachusetts Annual Expenditures on Electric Efficiency vs. Electric Supply (2008)

In 2008, we spent roughly 50 times more on supply resources that were three times more expensive than available efficiency resources, needlessly draining our economy and sending billions of dollars out-of-state to purchase polluting fossil fuels.  The new approach established in the GCA requires our natural gas and electric utilities to invest in all cost-effective efficiency resources before more expensive supply in order to generate billions in consumer savings, stimulate job growth, and increase our state’s gross state product.

Three core statutory components drive the new efficiency mandate.  First, Program Administrators (“PAs”: gas and electric utilities and the Cape Light Compact) are required to propose 3-year plans to acquire “all [gas and electric] energy efficiency and demand reduction resources that are cost-effective or less expensive than supply.”[v]  Second, the GCA provides funding streams to make the necessary up-front investments in energy efficiency.[vi]  Third, the statute created an 11-member Energy Efficiency Advisory Council (“EEAC” or “Council”), made up of stakeholders representing a variety of constituencies, including business, manufacturing, residential, environmental, labor, low-income, consumer, and state government.  The Council is charged with advising the PAs on the development and implementation of greatly expanded and enhanced efficiency programs, and making recommendations to the Department of Public Utilities (“DPU”).[vii] 

The driving mechanism in the GCA for advancing cleaner and more affordable energy is the requirement that utilities treat energy efficiency as a “first fuel,” that must be procured whenever it is cheaper than supply.  The PAs must propose 3-year efficiency procurement plans to be reviewed and approved by the EEAC and the DPU.  Unlike money spent on fossil fuels and other supply, investments in efficiency stay in the Massachusetts economy.  Efficiency investments translate to savings in customers’ pockets and efficiency services jobs.  These economic effects are multiplied as those dollars are spent within the local economy, thereby contributing to the creation of jobs in other sectors of the economy and increasing gross state product.[viii]

The GCA also provides for full funding of all-cost-effective energy efficiency through a number of mechanisms.[ix]  On the electric side, programs are funded through (a) a 0.25¢/kWh systems benefit charge; (b) utility proceeds from bidding energy efficiency into the ISO-NE Forward Capacity Market; (c) proceeds from the sale of Regional Greenhouse Gas Initiative allowances (at least 80%); (d) other funding sources after the DPU has considered rate impacts, the availability of private or public funds, and the impact of past programs on lowering electricity costs.[x]  Gas funding is also provided for under the GCA.[xi]  In making funding decisions, the DPU must “ensure that they are delivered in a cost-effective manner capturing all available efficiency opportunities, minimizing administrative costs to the fullest extent practicable and utilizing competitive procurement processes to the fullest extent practicable.”[xii]

The third key to the success of Massachusetts’ new system of least cost procurement is the statutorily defined role and active involvement of the EEAC.  The EEAC provides a forum for input and oversight by the constituencies and consumer sectors that both pay for and reap the tremendous benefits of investments in cost-saving energy efficiency programs.  Under the GCA, the EEAC is comprised of representatives of residential and low-income consumers, the environmental community, businesses, including large C&I end-users and the manufacturing industry, efficiency experts, organized labor, the attorney general and various state agencies including the Department of Energy Resources, which serves as the chair.[xiii]  The Council is able to retain expert consultants that help to review the efficiency plans proposed by the PAs, provide advice and suggestions on new program designs in the best interest of the diverse stakeholders, and oversee the evaluation, measurement, and verification of the efficiency programs to ensure consumer value.  The Council also helps to assess the size of the available cost-savings efficiency resource and reports annually to the legislature on the consumer savings achieved through efficiency program implementation. Approval of PAs’ proposed 3-year efficiency procurement plans requires a two-thirds vote of the Council and then goes on to a review process at the DPU.

To facilitate the GCA’s requirement that utilities invest in all cost-effective energy efficiency before more expensive supply, the DPU established a critical new policy to align utility financial incentives with customers’ interests. The DPU established a revenue decoupling model in Massachusetts through a generic order.[xiv]  Historically, utilities revenues were linked to their sales volume, meaning they made more money when consumers’ energy use increased and lost money when customers reduced their energy use through participating in efficiency programs.  Revenue decoupling fixes this problem by breaking the link between utilities revenues and energy sales so they become financially neutral to the large bill savings consumers experience by participating in efficiency programs.  In its decision, the DPU provided a detailed description of how the Commonwealth would employ a reconciling mechanism for both electric and natural gas utilities to eliminate the strong financial disincentives to utility investment in energy efficiency and distributed generation.  To date, the DPU has approved full revenue decoupling mechanisms for eight of the states utilities.[xv]  This ensures that utilities do not lose money when they are successful in lowering their customers’ energy consumption and bills.

Early Results

In just 3 years, the GCA has inspired new approaches to energy efficiency and is bringing quantifiable benefits to the Commonwealth.  According to the EEAC’s 2010 report to the legislature, Massachusetts met or exceeded its goals for the first year of the 3-year plan.  Savings from investments made in 2010 will exceed 7,400 gigawatt hours (7,400,000,000 kWh) of electricity and 228 million therms of natural gas.  Total savings to customers over the lifetime of the measures installed in 2010 will be more than $1.3 billion.  These reductions are also good news for the environment, with energy savings reducing greenhouse gas emissions by more than 300,000 metric tons per year—helping to deliver on the Commonwealth’s global warming reduction targets.[xvi]  The PAs are on track to deliver a staggering $6 billion in economic benefits to Massachusetts consumers over the first 3-Year Efficiency Plan.

Beyond the direct savings that they’re generating for customers, efficiency investments are proving to be a smart economic decision for the state overall.  ENE’s macroeconomic modeling shows that the money invested in efficiency in Massachusetts in 2010 will increase gross state product by more than $2.2 billion and create substantial new employment – estimated to be more than 14,000 job-years.[xvii]  In addition, Massachusetts-based efficiency companies are growing, including Westborough-based Conservation Services Group (CSG), which has added 250 employees in Massachusetts since 2008 and Next Step Living, which has grown to roughly 220 employees since its founding in 2008.  Additional job creation in the wider economy is occurring as customers and businesses save on their bills and spend a portion of that money on local goods and services.  The GCA’s focus on investment in low-cost efficiency is paying off for the Commonwealth.

Under the GCA, the state is adopting cutting edge approaches to efficiency programs and serving more customers.  Efficiency programs provide all consumer sectors with energy audits and technical assistance, rebates and incentives to reduce the upfront cost of more efficient products and retrofits, and financing options to pay for the “customer contribution” of efficiency investments.  The Mass Save program[xviii] is the core service for residential customers and with new funds the program is integrating services and developing methods for reaching more households and achieving deeper savings.  Consumers who take advantage of all the efficiency upgrades, rebates and incentives can see their energy bills drop by as much as 40 percent.

Greater investments in efficiency have also allowed for new innovative Community Mobilization Pilots to increase participation in segments of the population that have traditionally not taken advantage of energy savings programs.  New programs to serve low-income customers living in multi-family buildings have also been created.  Another program sends community advocates and professionals into communities to educate small business owners and directly install energy saving measures that they would not otherwise be able to afford.  Large business efficiency services focus on entering into multiyear energy saving plans with a variety of large institutions (including private companies, universities and hospitals) to retrofit and replace inefficient systems and equipment.  Municipal programs provide technical and financial assistance to cities and towns to help them improve building efficiency, install new measures, and take other steps to meet Green Communities standards.  The PAs work with the Council to design, track and review these programs to measure and document successes and opportunities for improvement.  

The GCA established a cost-saving efficiency policy framework that would yield tremendous benefit in other states if replicated.  Lawmakers, energy and environmental advocates, and other stakeholders nationwide have taken notice of the success in Massachusetts and our recent #1 State Efficiency Scorecard ranking and are looking to us as a model.  The savings goals established in Massachusetts and other states with similar efficiency procurement policies – like Rhode Island and Vermont – are tops in the nation. 

The GCA’s process for identifying and procuring all efficiency resources that are cheaper than supply is designed to gather and react to feedback and results.  The PAs adjust their goals each year and work toward achieving deeper savings and greater program participation. The cost-effectiveness of measures and the real benefits they deliver are constantly being evaluated by stakeholders on the Council and by the DPU.  The GCA is getting results and will continue to do so because it seeks to achieve consensus and constantly improve.

Going Forward

As we move into the next 3-year planning phase, the GCA framework continues to ensure that a statewide approach to efficiency planning saves consumers billions of dollars through lower energy bills, supports only cost-effective efficiency measures, and contributes substantially to the Commonwealth’s goal of reducing greenhouse gas emissions. The EEAC and PAs will continue to find ways to improve the delivery of efficiency programs to all customers, and to integrate gas and electric program offerings.  The GCA has established a durable and fundamentally sound approach to energy efficiency policy, one that provides the right framework for allowing continual improvement and oversight while enabling Massachusetts to set the proper level of investments in this lowest cost energy resource.



[i]  The ACEEE is a nonprofit, 501(c)(3) organization dedicated to advancing energy efficiency as a means of promoting economic prosperity, energy security, and environmental protection.  ACEEE was founded in 1980 by leading researchers in the energy field. Since then we have grown to a staff of more than 35. Projects are carried out by ACEEE staff and collaborators from government, the private sector, research institutions, and other nonprofit organizations. (see http://www.aceee.org/about).

[iii]  http://www.aceee.org/research-report/e115

[iv] 2008 Mass. Acts, c. 169.

[v] Mass. Gen. Laws ch. 25, § 21. Supply costs are measured by the average of the past two years.

[vi] Mass. Gen. Laws ch. 25, § 19.

[vii] Mass. Gen. Laws ch. 25, § 22.

[viii] ENE's 2009 report, "Energy Efficiency: Engine of Economic Growth" quantifies the macroeconomic impacts of increased energy efficiency investments in New England, where efficiency has assumed a leading role in energy policy. It is available at http://www.env-ne.org/public/resources/pdf/ENE_EnergyEfficiencyEngineofEconomicGrowth_FINAL.pdf.

[ix] Mass. Gen. Laws ch. 25, § 19.

[x] Mass. Gen. Laws ch. 25 §19(a).  

[xi] Mass. Gen. Laws ch. 25 §19(b).

[xii] See Mass. Gen. Laws ch. 25, §19.

[xiii] Mass. Gen. Laws ch. 25, § 22.

[xiv] D.P.U. 07-50-A, “An Investigation by the Department of Public Utilities on its Own Motion into Rate Structures that will Promote Efficient Deployment of Demand Resources,” at 5, (July 16, 2008). http.www.env.state.ma.us/dpu/docs/electric/07-50/71608dpuorder.pdf.

[xv] For additional information about MA approach to decoupling, please see Jamie Tosches Demello’s article in the Summer 2011 Business Law Section Newsletter (Vol. 7)   “Update on Implementation of Decoupling and Cost Trackers: Recent Changes and Trends in Regulatory Ratemaking,” at 5-8.   Available at http://www.bostonbar.org/sc/bl/nl1011/bl_nl_summer11.pdf

[xvi] Massachusetts Clean Energy and Climate Plan for 2020, A report to the Great and General Court pursuant to the Global Warming Solutions Act (Chapter 298 of the Acts of 2008).  Available at  http://www.mass.gov/Eoeea/docs/eea/energy/2020-clean-energy-plan.pdf  

[xvii] Employment estimate is derived from ENE’s 2009 Economic Engine Report, supra n. 9.