What the Powerful New Energy Efficiency Rules in Maryland Really Mean

Under changes to the EmPOWER Maryland energy efficiency program - enacted a week ago - state regulators have committed us to saving a lot more electricity and natural gas. While the order from Maryland’s Public Service Commission (PSC, available here) spans a mere 33 pages, there’s a lot packed into this slim document. Here’s what’s there, and what it means:

1. A two-percent-per-year savings goal based on retail sales of electricity, with directions to establish similarly impressive goals for natural gas and for low-income programs. This is on par with national energy efficiency leaders including California, Massachusetts and Vermont. Our coalition of Maryland Energy Efficiency Advocates (the Coalition) pressed for this goal in our testimony this February. Previously, the goal was to achieve a certain percentage of savings by 2015, but the approach for determining the actual goal for each utility was not universally supported. This isn’t as useful as establishing a reliable ramp-up of efficiency over time, especially for the small businesses and entrepreneurs in an increasingly robust supply chain for delivering energy efficiency services and products to Marylanders. Once we have a planned annual rate of improvement, utilities and efficiency providers can make plans accordingly.
2. Cost-effectiveness determinations will be prospective in addition to retrospective, and will for the first time rely more on a “societal cost test” (SCT) using a relatively low societal discount rate (discount rates, which help determine the net present value of investments, make a big difference in these calculations). This will be paired with continued use of the “total resource cost test” or TRC for gauging cost-effectiveness retrospectively and in comparison to other jurisdictions (many of which use this more limited test). This is a tremendous advance for Maryland, although it may not be readily apparent to the layperson. The state, as with many other states, has relied primarily on the TRC since EmPOWER programs were first put in place in 2009. But the TRC is often an incomplete and therefore unfair test. It accounts for costs comprehensively but often excludes benefits, including ones that are important to consumers such as comfort and improved air quality. Complementing the TRC with an SCT allows for a more comprehensive assessment of benefits and more room for innovation in energy efficiency investments. The PSC explicitly mentions evidence offered by our coalition, and notes that this also aligns the program with the statute that launched EmPOWER: “…[T]he Coalition contends that failing to account for ‘benefits that accrue to participants and non-participants alike, such as reduced air pollution and the corresponding reductions in adverse health effects’ mischaracterizes the true cost-effectiveness of energy efficiency investments. A failure on our part to consider a broader societal impact stemming from the implementation of energy efficiency programs would ignore the codified intent of the General Assembly ‘to provide affordable, reliable, and clean energy for consumers of Maryland.’ This directive is not limited to only those consumers who participate in an energy efficiency program, just as the benefits of energy efficiency investments do not accrue only to direct program participants. We concur with MEA [the Maryland Energy Administration] that the directive of the General Assembly to the Commission requires a societal viewpoint as the primary orienting framework, and thus we direct the use of both the TRC and the SCT as assessment tools for purposes of conducting preliminary cost-effectiveness screening.” As the old saw goes, you do what you measure. Complementing the TRC with the SCT shows stunning foresight by regulators intent on accounting for, and capturing, the many benefits of energy efficiency.
3. This move opens up space to include several non-energy benefits (NEBs) into Maryland’s cost-effectiveness testing. In an era of improving data analytics, accounting methods should become more comprehensive and robust as we gather more data and develop better methods of, and software for, analyzing it. And here Maryland concurred with the state’s lead energy efficiency consultant, Itron, which presented its recommendations earlier this year. I was a particularly active member of the working group on cost-effectiveness, and hired respected economist Lisa Skumatz to examine Maryland’s options for accounting for NEBs. The Itron recommendations were thoughtful and backed up by good evidence and arguments. And the PSC agreed, directing that non-energy benefit “adders” proposed by the state’s consultant Itron be used in cost-effectiveness testing, specifically to account for increased residential comfort, reduced operations and maintenance costs for commercial and industrial firms, reduced arrearages and reduced air pollution. Maryland’s accounting for cost-effectiveness takes another leap forward in comprehensiveness and sophistication, capturing a more complete array of benefits of energy efficiency investments thanks to this move.
4. Natural gas and low-income investment savings goals are also to be established by working groups facilitated by PSC staff, and our coalition hopes to participate in these teams to help determine solid goals for Maryland. Interestingly, the PSC also wondered if there should be a multifamily savings goal. While commissioners stopped short of ordering a multifamily goal, they do require increased monitoring of these investments to assure that they are sufficient relative to the size of the market. This is a big deal since single-family residences receive the bulk of the focus in energy efficiency programs in Maryland and many other states.
5. The PSC also continued the Maryland approach of assessing cost-effectiveness at the subportfolio level, separating Commercial and Industrial budgets from Residential ones. I think that analysis at the level above that - the portfolio level - would be even better, but this is still good policy. And better still, the commission agreed with our proposal to roll up low-income programs into their own subportfolio to determine cost-effectiveness (as opposed to the current practice of measure-by-measure examination), but in the name of tracking and improving performance as opposed to disqualifying investments: “Therefore, we accept the recommendation of the Coalition that, while cost-effectiveness screening of the limited income sub-portfolio shall be required in the same manner as with respect to the other EmPOWER sub-portfolios, the results of the limited-income sub-portfolio screening shall serve as a point of comparison to other jurisdictions and past programmatic performance rather than as the basis for precluding certain limited-income program offerings.”

“Stunning foresight,” “good moves,” “thoughtful” - these are the words I’ve used to describe this order. Other coalition members have used similar words here and here.

And, I’ll add another - historic. Thanks to leadership and smart policymaking by the PSC, Maryland is poised to take a huge leap forward in energy efficiency. We can all look forward to pocketing more of our hard-earned money as energy bills go down thanks to these savings. And since energy costs are regressive - i.e., they hit those who can least afford it the hardest - it’s also important to note that the PSC order’s focus on improving low-income investments will also help boost equity in Maryland’s energy efficiency programs. More efficiency + more equity means a brighter energy future for our state.