Act 129 is Pennsylvania’s largest program to advance energy efficiency. In the first three phases of the law, utilities installed thousands of LED lights, smart thermostats, efficient appliances, and incentivized the construction of thousands of high-efficiency homes, which delivered an estimated more than $9 billion in benefits and expanded the energy efficiency industry to over 71,000 jobs in Pennsylvania by 2019. On June 18, the Pennsylvania Public Utility Commission issued its Final Implementation Order for Phase IV, setting the targets and the rules of the road for the next five years of the program. Utility investments required by the law will total close to $1 billion over the five-year period of “Phase IV.”
Major changes in Phase IV
The simplest answer to the question of what Phase IV will look like is, “a lot like Phase III, with less lighting.” Judging from the Phase IV Final Order, the Pennsylvania Public Utility Commission seems to have taken the view that Phase III of Act 129 was pretty successful, and if it ain’t broke, don’t fix it.
That said, there are 3 major changes that market participants should know about in Phase III.
Fewer lighting rebates for Commercial & Industrial programs, and almost none for residential.
Phase IV Residential Program Potential
This has been a long time coming, and is more driven by the market maturation of LED lighting than anything else. In its Phase IV Technical Reference Manual, the PUC increased the “baseline” for lighting to 45 lumens per watt – more efficient than any incandescent bulb. With the increased baseline, utilities won’t be given any credit toward their reduction goal by installing LED lights. Instead, utilities will need to invest in other measures, such as heating and cooling, appliances, new construction, and behavioral programs.
No specific mandate for “GNI” – Government, Non-profit, and Institutional – customers.
Previous Phases have required utilities to meet at least 10 percent of their overall electricity reduction target with efficiency programs for GNI customers. However, given that large GNI customers – particularly hospitals and universities – are some of the most eager participants in energy efficiency programs, utilities have exceeded their GNI targets by huge margins – and those reductions have generally come at a lower cost than the average for all customers. Consequently, the Commission determined – and KEEA agrees – that the GNI carveout is no longer necessary.
Demand Response replaced by energy efficiency nominations to the PJM capacity market.
Act 129 sets two types of targets for utilities: consumption reduction targets, measured in MWh, to reduce the total amount of electricity sold, compared to a 2010 baseline; and demand reduction targets, measured in MW, to reduce the maximum capacity needed on the electric grid during the times when electricity demand peaks over the summer. In the past, utilities have been expected to meet peak demand targets through dispatchable demand response programs that pay customers to reduce their consumption during peak consumption events. In Phase IV, the Commission will require utilities to reduce their overall demand through the energy efficiency measures themselves, and to bid at least a portion of that demand into the PJM capacity market. The upshot is that utilities will limit their offering of demand response programs, and will prioritize energy efficiency measures that also reduce peak demand. Additionally, third-party companies that currently aggregate demand reduction from energy efficiency projects – mostly in the C&I sector – and bid that demand reduction as capacity in PJM will face competition from monopoly utilities.
Where the Phase IV Final Order falls short
In several areas, the Commission declined to accept suggestions from KEEA and other stakeholders. Below are some of the key areas in which we believe the final order falls short.
The Commission reduced savings targets and did not enact policies to ensure that investment does not decline.
The Commission set lower first-year savings targets for utilities in Phase IV than Phase III. They project that utilities will replace lighting programs mostly with “whole building” programs that place an emphasis on long-lived measures such as insulation and HVAC equipment that have high upfront costs, but can deliver big benefits over time. While long-lived measures can be more cost-effective over their lifespan than many short-lived measures like lighting or behavioral programs, they reduce less electricity consumption in their first year per dollar spent compared to lighting. This reasoning makes sense, and would not reduce overall energy efficiency investment or long-term savings if utilities make the types of investments in long-lives measures that the Commission assumes they will. But the Commission does nothing to ensure that utilities don’t simply respond to lower savings targets by investing less and keeping a focus on shorter-lived measures.
Phase III to IV Comparison Chart
The Commission did not require utilities to offer more longer-lived measures as part of their programs.
An additional commonsense measure suggested by KEEA and other stakeholders to ensure utilities make balanced investments in energy efficiency programs is to simply require that they do so. While the Commission professed a desire for utility plans to make investments in long-lived measures, they took no policy action to ensure or incentivize that outcome. Without a requirement or target for long-lived measures, or any ratemaking or earning incentive to invest in long-lived measures, utilities will likely continue to rely heavily on short-lived measures that deliver first-year savings the lowest possible cost.
The Commission gave no special treatment to underserved sectors.
KEEA agrees with the Commission’s analysis that a specific carveout for the GNI sector was no longer necessary since utilities were exceeding the target by huge margins and at lower cost than the rest of the portfolio. However, KEEA and several other stakeholders identified specific sectors or customer segments that do not receive savings and benefits proportional to their consumption due to market barriers. These include multifamily buildings and local government street lighting. The Commission indicated it expected utilities to report savings from multifamily buildings for the first time, but would not require utilities to deliver a certain level of savings to multifamily buildings.
What to look for in the months ahead
In November, Pennsylvania utilities will file 5-year energy efficiency plans with the Commission that will conform to the policies enumerated in the Final Order. This will be a final opportunity for stakeholders, including the energy efficiency industry, to advocate for priorities such as an appropriate balance of short-term savings and long-term investments; equity across all customer segments; and continued investment in energy efficiency measures after minimum savings targets are met.
Additionally, one or more utilities will likely file rate cases with the Public Utility Commission in 2021 – the first rate cases from Pennsylvania electric utilities since the passage of Act 58 in 2018. Under Act 58, utilities may propose performance-based rates and revenue decoupling that could for the first time begin to align the utility business model with energy efficiency. If a utility proposes and Commission approves a ratemaking mechanism that rewards investment in long-lived energy efficiency measures or continued energy efficiency investment after minimum savings targets have been achieved, some of the missed opportunities in the Phase IV Final Order could be captured.