Thank you for this opportunity for me to speak to you today about the costs and benefits of public support for energy efficiency and renewable energy programs in Virginia. My name is George Hagerman, and I am speaking on behalf of the Center for Energy and the Global Environment. (CEAGE), one of many engineering centers at Virginia Polytechnic Institute and State University. Our Center is based at the Alexandria Research Institute, a research campus recently established by Virginia Tech's College of Engineering in Old Town Alexandria. CEAGE combines the resources and expertise of faculty members and students from six departments at Virginia Tech and provides an opportunity for collaborations with engineers and scientists from around the world to research and develop new technologies for sustainable production and efficient use of energy while preserving environmental quality.
In addition to collaborative international projects undertaken by CEAGE, we also have significant energy efficiency and renewable energy initiatives at the state and local level. This fall we will begin an outreach project for promoting the installation of geothermal heat pumps for classroom heating and cooling in schools throughout Virginia.
Locally, we are pursuing several funding opportunities to develop a hybrid electric vehicle shuttle to reduce street-level air and noise pollution and to ease traffic and parking congestion on the streets of Alexandria's Old Town historic district.
The Maryland-Virginia-DC chapter of the Solar Energy Industries Association (MDV-SEIA) has offered its position on the speakers' agenda for this presentation; however, my remarks were prepared on behalf of CEAGE and do not necessarily represent the views of MDV-SEIA. This presentation is intended to accomplish three goals:
(1) to provide examples of the types of energy efficiency and renewable energy programs that a public benefits fund might support;
(2) to describe the potential economic and environmental benefits of such programs in Virginia; and
(3) to estimate the dollar amount necessary to fund these programs.
It is beyond the scope of this presentation to suggest how public benefits funding might be achieved or how a public benefits program would be implemented. In preparing these remarks, my colleagues and I simply wanted to identify the kinds of energy efficiency and renewable energy projects that could yield significant economic and environmental benefits to Virginia's citizens and to estimate a reasonable range of funding levels to support such programs.
An array of market barriers prevents consumers from choosing energy efficiency and renewable energy (EERE) investments, even when such an investment offers the lowest life-cycle cost among different alternatives. These barriers include lack of information and lack of time or material resources for obtaining better information, high first-cost, access to project financing, equipment performance uncertainties, and product or service availability. The first section of this presentation describes public programs that are designed to reduce or remove these barriers and have a lasting impact after public intervention ceases. The ultimate goal is a competitive market where customers are fully able to access all cost-effective EERE alternatives.
The intent of this section is to describe five different programs in terms of the type of financial transaction and expected outcome, rather than to describe specific EERE technologies that should be targeted by such programs. Technology-specific examples, however, are given in Appendix A in order to illustrate how a particular type of program overcomes existing market barriers and accomplishes enduring market transformation.
The five types of public benefits programs that will now be discussed are:
(1) Cost-sharing of research and development projects;
(2) Rebate of incremental first costs;
(3) Performance- and production-based financial incentives;
(4) Outreach activities such as technical assistance, training, and education; and
(5) Deployment of EERE technologies in schools.
Cost-Shared Research and Development. State funding availability for new technology research and development (R&D) is likely to be small relative to the need. Any success will depend upon leveraging other financial resources. Such leveraging can provide an immediate payback to Virginia, particularly with already established federal initiatives.
Appendix A describes two R&D leveraging opportunities with the U.S. Department of Energy (DOE). The first of these would be to provide cost sharing of university and business research proposals submitted in response to various DOE Broad-Based Solicitations, which often require a significant share of the project cost be supported by non-federal matching funds. The required match is typically 20% to 40% of the total project cost, so this program would have a 2-to-1 benefit-to-cost ratio, yielding two federal research dollars for every Virginia dollar invested.
Another significant federal R&D leveraging opportunity exists with DOE's Small Business Innovation Research (SBIR) Program. This is an annual competitive solicitation targeted specifically toward small businesses (fewer than 500 employees), though a significant portion of the research can be subcontracted to universities (and Virginia's Center for Innovative Technology provides additional incentives for State university participation; see Appendix A for details). Here the suggested financial transaction is to provide public benefits funding to support proposal development by Virginia small businesses pursuing SBIR funding of their EERE technologies. As documented in Appendix A, such a proposal support program could yield ten to one hundred federal dollars for every Virginia dollar invested.
Note that these federal R&D funding programs are already designed and operational, so the administrative overhead cost to the State for providing non-federal matching funds should be relatively low. Establishing a program for competitively soliciting applications for SBIR proposal support would involve greater administrative overhead, but this would be more than offset by the much greater potential leveraging ratio.
Rebate of Incremental Costs. Customers often face a higher first cost if they adopt an energy efficient or renewable energy option instead of the "business-as-usual" approach, even if the EERE option has a lower life-cycle cost. The first-cost difference between the two alternatives is referred to as the incremental cost. In this type of program, customers would receive a rebate covering all or most of the incremental cost of adopting an EERE measure.
Over time, as economies of increased production and deployment are realized, the incremental cost and associated rebate funding are expected to decrease. Furthermore, mechanisms could be established whereby customers repay some or all of the rebate from savings over the life of the investment, tending to make the rebate fund self-sustaining. Two examples of incremental cost rebate programs are described in Appendix A, one for commercial and industrial motors and another for residential heating and cooling.
Performance- and Production-Based Financial Incentives. Energy performance contracting by energy service companies is a growing industry in Virginia and represents an important opportunity for publicly funded financial incentives. Appendix A describes a "standard offer" program proposed by the Maryland Energy Administration as a means of overcoming significant market barriers to widespread implementation of energy efficiency retrofit projects, which is the primary target of the performance contracting industry. Note that such performance incentives represent annual funding commitments but not actual outlays, which will be substantially smaller because the incentives per kwh will be made available only as savings actually accumulate over the life of a retrofit project.
For renewable energy projects, production tax credits based on the number of kilowatt-hours actually generated have proven more effective than investment tax credits based on the amount of installed generation capacity. Production tax credits also eliminate the intentional use of poorly performing renewable energy projects as income tax shelters. The shift from capacity-based to production-based tax credits has been a major factor in the improved performance and life-cycle cost of wind turbines to the point that wind energy is now cost-competitive with more conventional generation sources in states with good wind energy resources. The federal renewable energy production tax credit is described in Appendix A, and some states are considering similar credits for state income taxes. The federal credit applies to wind and "closed-loop" biomass energy systems; Colorado is considering extending the credit to household PV systems as well.
Outreach Activities. Outreach to vendors and is an important feature of any public benefits program and is a vital adjunct to the rebate programs described in Appendix A for commercial and industrial motors and for residential HVAC systems. Another area where vendor training and technical assistance can have a significant beneficial impact is in new construction or major renovation of commercial and industrial buildings.
Program outreach activities include technical assistance to design professionals and building commissioning (see Appendix A for details). A C&I building program also could have an incremental cost rebate component for developers/owners, since it is normally the tenants who receive the economic benefit of energy savings. Incorporating utility bills into the rent is another means whereby developers/owners can realize a financial return on EERE investments.
Technology Deployment in Schools. Schools provide an ideal location for subsidized deployment of site-based renewable energy technologies. They have abundant rooftop area to support installation of solar panels for any combination of photovoltaic power generation, domestic water heating, or swimming pool heating. Likewise, parking areas and athletic fields provide ample space for the wells that provide ground-source heat exchange in geothermal heat pump systems. More than two-thirds of the nation's schools were built before 1960, and one in five have less than adequate HVAC systems. So there are tremendous opportunities for energy efficiency improvements.
Schools have high visibility and are often the center of the surrounding neighborhood, thus providing opportunities to teach not only of students, but also community leaders and local government officials about energy efficiency and renewable energy technologies. Even more importantly, active participation of students in school-based EERE projects has a high probability of "trickling up" to parents, who are then better prepared to consider energy efficiency and renewable energy options for their homes and workplaces.
Appendix A describes a variety of school-based EERE project initiatives in neighboring states. Because of its national leadership in information and communication technologies, Virginia is in a unique position to take the best deployment features of these programs and develop Internet-based educational components. The broad-band transmission capabilities of Network.Virginia would enable students to have "hands-on" access to environmental data, system performance measurements, and design features of school-based EERE projects throughout the state. Indeed, with properly designed lesson plans, such projects provide an opportunity to engage students in applying fundamental math and science learning standards toward creating a comfortable and healthy environment in the classrooms they occupy.
Renewable energy resources provide a clean domestic and sustainable energy resource that can enhance air quality in the State as well as business development. As a distributed generation source, renewable energy (RE) can provide better utilization of utility grid distribution systems by enabling power supplies to be located closer to power demand, thereby reducing the line losses associated with central generating stations. Previously described public benefits programs for cost-sharing R&D of new RE technologies and for promoting site-based RE in schools and in new or renovated buildings can assist in overcoming market barriers that these technologies face and bring them to the point of cost competitiveness with more conventional electricity supplies.
One of the greatest concerns about deregulation is loss of environmental quality as electricity providers compete for market share. Before deregulation, utilities could engage in least-cost planning that included both supply-side and demand-side management (DSM) approaches to meeting customers' electric service requirements. DSM tactics fall into two strategic categories:
Before deregulation, utilities had to reliably meet the system-wide peak load of all customers in their service area. Peak shaving enabled utilities to defer expensive capacity additions, and a package of DSM measures was often the lower-cost way to meet this reliability requirement. Load shifting also had significant environmental benefits. Not only did it defer the added fuel consumption and associated air emissions of capacity additions, but it reduced the need for inefficient starting and stopping of peaking plants and of operating intermediate plants at no load or partial load in order to maintain spinning reserve.
In a deregulated environment, load-shifting DSM tactics will drive away customers who do not want to contend with time-of-use pricing schemes (witness the disappearance of time-of-use pricing of long-distance service in a deregulated telephone market) or utility control of their HVAC systems and other equipment. Furthermore, load shifting requires that a utility invest in more expensive metering and control equipment, raising costs and reducing competitiveness. In the absence of free-market incentives for load shifting, increasing end-use efficiency remains the only potentially viable DSM strategy; hence the environmental importance of removing market barriers through the public benefits programs described in this presentation.
In most states, the determination of initial funding levels for public benefits programs has been set to reflect recent spending levels by utility-based DSM programs before restructuring. It is important to recognize that these funding levels were the result of past negotiations and regulatory deliberations on energy efficiency spending, rather than an analysis of barriers and the level of spending required to create enduring transformation of a deregulated utility market.
Nevertheless, they do indicate the spending order of magnitude that state agencies and utilities have agreed upon as appropriate to achieving certain objectives:
(1) least-cost delivery of energy services to sustain economic growth;
(2) least-cost reduction of air pollutants and greenhouse gases; and
(3) equitable distribution of benefits (1) and (2) to all customers, regardless of size or income level.
To the extent that utilities abandon these objectives as a means of lowering costs in order to attract or retain large customers in a competitive energy market, then public funding of benefits programs to safeguard these objectives might reasonably be expected at dollar levels similar to utility-based programs before deregulation.
The Maryland Energy Administration has surveyed public benefits programs in nine deregulated states and proposed dividing the annual funding amounts by total electricity sales in those states during recent years to estimate what an appropriate systems benefit charge might be in Maryland (see Appendix B for data and references). We performed this calculation based on state utility generation statistics for 1996, the most recent year for which the U.S. Energy Information Administration has published data. The resulting average is 9.2 mills per kWh ($0.0092/kWh) and ranges from a low of 0.03 mills per kWh in Illinois to more than 20 mills per kWh in Massachusetts and Rhode Island. By comparison, historic funding of DSM programs by Potomac Electric Power Company (PEPCO) in Maryland was 4.2 mills per kWh in 1994.
In 1996, Virginia utilities generated a total of 56.5 billion kWh. Based on the above results, it seems reasonable to expect public benefits funding in the range of 4.2 to 9.2 mills per kWh,
which yields an initial program funding range of $240 to $520 million per year. This is not a recommendation to establish a systems benefit charge in Virginia; it simply illustrates a first-cut approach to estimating the annual funding that reasonably might be expected in order to maintain economic and environmental benefits of energy efficiency and renewable energy programs at levels generally agreed upon in other states.
Thank you again for the opportunity to make this presentation. If there is time, I will answer any questions that I can now. Otherwise, please contact me after the hearing, and I'll be happy to discuss any of the items in this presentation or in the appendices at greater length.