States should make energy efficiency a priority as they develop plans to reduce carbon dioxide (CO2) emissions from coal- and gas-fired power plants under the Environmental Protection Agency’s (EPA) Clean Power Plan, because saving energy is a cheap way to reduce emissions. To make sure that emission reductions are real, however, states will need to take specific steps to make sure energy efficiency is credibly quantified. This blog examines those steps.
The Clean Power Plan
The Clean Power Plan sets national carbon dioxide emission limits for existing coal- and gas-fired power plants. States have an opportunity to adopt “state plans” that include enforceable emission limits and other policies to ensure power plants comply. An important choice for states is whether to apply rate-based or mass-based limits on power plants. If they choose to apply rate-based limits, states will have to strengthen the processes currently used to quantify savings from energy efficiency programs, so these savings can be turned into Emission Rate Credits (ERCs). I explain these below, but first here is some background, or you can just skip the next two sections and instead read my blog on ERCs.
The difference between rate- and mass-based limits
In mass-based plans, the state creates a permit – called an allowance – for each ton of carbon pollution power plants are allowed to emit in the coming year and then distributes these allowances. Power plant owners must turn over allowances equal to their emissions. Actions that reduce electricity consumption manifest in the tons of carbon pollution emitted from a power plant’s smokestack, so states do not need to do anything additional to account for energy efficiency. A state will still want to evaluate programs to make sure they are effective.
In rate-based plans, the state establishes an allowed emission rate for its power plants: total pounds of CO2 emitted divided by total megawatt-hours (MWh) generated. Power plant owners must show that their emission rate was equal to or less than the rate-based limit. Actions that reduce electricity consumption do not manifest in the power plant’s emission rate; states that apply rate-based limits must account for these actions by creating Emission Rate Credits (ERCs).
ERCs: definition, purpose, and eligibility criteria
One ERC equals an emissions-free megawatt-hour of electricity. The operator of a coal or natural gas plant can add the emissions-free MWhs of acquired ERCs to the MWh that the plant actually produced during the year. The operator then divides that combined number of MWh into the amount of CO2 emitted by the plant to determine the plant’s effective emission rate for compliance purposes.
To be turned into an ERC, MWhs must come from eligible projects (including electricity saving projects like a lighting retrofit in a commercial building) installed in 2013 or later, connected to the grid, and located in a rate-based state. The electricity savings from energy efficiency projects must be quantified after the program has operated: you cannot get ERCs from a pre-program estimate. Only MWhs produced or saved in 2022-2030 are eligible, except in the case of the Clean Energy Incentive Program, where MWHs produced or saved in 2020 and 2021 are eligible.
New risks mean states must implement new processes to produce ERCs from electricity savings
Emission rate credits will be the primary tool that power plant owners in rate-based states use to reduce their emission rates. It is critical that ERCs represent real emission reductions. There is an incentive to overestimate the MWhs saved by a project: project developers will receive more ERCs for projects that save more energy, and states will want to lower compliance costs. These risks add to those state regulators now manage when they estimate savings from energy efficiency efforts.
The process in general
The process for creating ERCs is straightforward:
- Developers submit an eligibility application to the state. The application shows the eligibility criteria described above are met; includes an Evaluation, Measurement, and Verification (EM&V) plan describing how electricity saved will be quantified and verified; includes a signed report from an independent verifier attesting the project meets eligibility criteria; and shows the application was only submitted to one state (to prevent double counting). The EM&V plan must provide that savings be quantified using “best practice” methods. EPA provides a set of best practices for quantifying savings in its draft EM&V Guidance.
- The state reviews the application, and if it approves, registers the project in an ERC tracking system.
- After the project is complete and operating for at least a year, developers submit a Measurement and Verification (M&V) report to the state, again reviewed by an independent verifier, that demonstrates the project is installed and working properly, describes how the methods described in the EM&V plan were implemented, and documents the amount of electricity saved.
- The state then reviews the M&V report, and issues an appropriate number of ERCs for the project into the tracking system.
- Fossil fuel-fired power plants can purchase these ERCs from project developers and use them to adjust their emission rate.
- Given the important role of independent verification, states have to develop a process to accredit and de-accredit verifiers.
Codifying current practice
Many features of the system codify current practices used by state public utility commissions (PUCs) to manage energy efficiency EM&V. Eligibility applications are similar to the efficiency program plans utilities now submit to regulators, which include EM&V plans for each program. Also, EPA is requiring savings to be measured from a Common Practice Baseline, a determination of what would have happened had the energy efficiency action not been implemented. This practice is the norm in the Pacific Northwest and many states around the country.
Making the implicit explicit
EPA’s requirements explicitly address a few EM&V topics that are now dealt with informally. Two examples:
- Mitigating the conflict of interest between evaluator and efficiency provider is a common priority of state PUCs, consumer groups, and environmentalists. In states with robust energy efficiency efforts, a portion of utility revenues are dependent on verified energy savings. An evaluator hired and overseen by the efficiency provider could act in the provider’s interest. States address this conflict in a variety of ways, however they usually do so informally, taking an “I know it when I see it” approach to evaluator independence. The Emission Guidelines, in contrast, require state plans to include explicit protections: verifiers must not have any direct or indirect financial or other interest in the subject of the verification report or ERCs that might impact their impartiality, and states must have a process to accredit verifiers and de-accredit bad actors or the unqualified.
- The Emission Guidelines require that energy savings be quantified using “best practice” methods, and EPA’s draft EM&V Guidance includes “presumptively approvable” methods that meet this criterion. States have long encouraged evaluators to use cost-effective and reliable methods to quantify savings. The guidance turns these goals into an EM&V framework that can be applied anywhere.
What should change?
Based on our preliminary review, EPA could improve the EM&V guidance and strengthen the draft federal plan in a few ways:
- Further restricting the use of “deemed” savings estimates, which are agreed-upon estimates for a single energy efficiency measure. These values are usually based upon previous EM&V studies, but they are only valid if used to estimate savings from a program similar to program earlier studied. I have seen utilities and evaluators misapply deemed savings values (Ok… just once. Guess who!). Using deemed savings is only appropriate for measures where there is little variation in savings, where the baseline technology (what was replaced) is the same in both the estimate and the program, and where inputs (like operating hours) are based on best-available information. These conditions are met fairly frequently, but it will be important for an M&V report to demonstrate that deemed values were properly applied.
- Strengthen verifier-efficiency provider conflict of interest protections to protect against additional conflicts: a verifier might be concerned that an unfavorable verification report could jeopardize future verification business with the provider. Also, a verifier could want to protect non-verification business with the provider.
- EPA should encourage states or providers to load savings estimates used to generate ERCs into a national database, to identify outliers and facilitate continuous improvement of energy efficiency programs. There are already effortsto standardize energy efficiency program descriptions and reporting templates that could be used.
- EPA should encourage states to implement a process where citizens can review and comment on M&V reports before they are turned into ERCs. This could significantly reduce disputes over the validity of ERCs.