There was some strange news out of Indiana recently. A piece of legislation designed to dismantle the state’s energy efficiency law made its way to the desk of Gov. Mike Pence. The governor neither vetoed nor signed the bill, thus allowing it to become law by default.
The governor defended his action, or inaction, as follows:
“I could not sign this bill because it does away with a worthwhile energy efficiency program. I could not veto this bill because doing so would increase the cost of utilities for Hoosier ratepayers and make Indiana less competitive by denying relief to large electricity consumers, including our state’s manufacturing base.”
This seems a bit odd at a time when most states are taking action to reduce energy consumption, encourage the adoption of renewables, and enable technologies such as storage systems to facilitate the rapid integration of renewables into their utility grid.
In fact most of Indiana’s neighbors continue to move forward on efficiency.
- Illinois utilities are set to reduce annual electricity demand by 1.5 million MWh over the next three years. ComEd has saved its customers more than $700 million through energy efficiency.
- Michigan utilities are reducing their electricity usage by more than 1 percent per year through energy efficiency. These utilities saved a net of $800 million in the first three years of their programs.
- A group of manufacturers in Ohio including Honda, Honeywell and Whirlpool recently wrote a letter to the state legislature urging them to keep the energy efficiency standards in place.
- Minnesota, Iowa, Missouri and Wisconsin are all using energy efficiency as a resource and capturing the benefits for their customers.
Why did Indiana let this happen? Was it simply a matter of politics?
The original bill, which was called the Energizing Indiana Program, was launched two years ago by former Gov. Mitch Daniels, who has gone on to become the President of Purdue University. The bill added a small monthly surcharge, an average of $2 per month, to ratepayers. The money was used to pay for energy audits, weatherization programs and rebates on energy-saving appliances. The bill made Indiana the 26th state to have such a program. The program was successful in meeting its objectives, saving enough energy to power nearly 78,000 homes, and was on track to save 1,800 megawatts of peak demand by 2022, according to a study conducted by Purdue University’s State Utility Forecasting Group. Sounds pretty good, doesn’t it?
But there were issues, apparently. A bill, introduced in the state Senate by Jim Merritt, amended the Energizing Indiana bill so as to let industries using more than 1 megawatt opt-out of the program. This was considered a tweak, to fix the bill to more closely reflect the original intent.
Merritt’s bill was then further amended in the House by fellow Republican Heath VanNatter to prohibit the Indiana Utility Regulatory Commission (IURC) from extending or entering into new contracts for the program after Dec. 31, 2014. This effectively kills the program.
The bill passed both houses by a wide margin, making Indiana the first state to back away from efforts to improve energy efficiency.
The move was greeted by this comment by Jodi Perra, Indiana Representative of Sierra Club’s Beyond Coal program:
“Today’s decision makes Indiana the first state in the nation to roll back its energy savings goals. There’s no denying that hundreds of energy efficiency workers will be out of a job next January when utilities cancel or scale back home energy audits, appliance rebates, and low-income home weatherization programs. We will now work with our coalition partners to make sure Indiana electric utilities will be required to replace what they’ve destroyed, despite their historic failure to reduce energy demand for the benefit of their customers.”
So the question is, why?
Clearly, the law was opposed by the utilities.
Edwin Simcox, speaking for the Indiana Energy Association, a utility group, said Energizing Indiana has cost ratepayers $500 million so far and would cost almost $1.2 billion by 2019. Proponents of the program dispute those numbers, and say no hard evidence for the figures has been presented. They point to a June 2013 evaluation that showed $2 savings for every dollar spent on efficiency. This is actually a little low. A study by the Southeast Energy Efficiency Alliance found a average return of 3.87-to-one, though two-to-one is still respectable. Perhaps if their efforts were more effective in producing savings, large consumers with the most to gain wouldn’t be complaining so much.
Perhaps it’s a matter of who those savings go to. In almost all cases, efficiency efforts, by keeping demand low, save utilities the expense of adding new capacity by constructing new plants that can be incredibly expensive. But reduced demand can also reduce revenues.
It makes sense that if your business depends on getting your customers to buy a certain product, you could be excused for being less than enthusiastic about programs that encourage your customers to buy less of that product. But there is a way around that problem.
According to the American Council for an Energy Efficient Economy, in their paper “Making the Business Case for Energy Efficiency:”
“Utilities have faced financial disincentives for customer energy efficiency programs since their advent in the 1970s and 1980s due to the structure of utility rates and the processes used to determine them. When these disincentives are not addressed, utilities investing in energy efficiency work against their shareholders’ financial interest. These disincentives are as follows:
1. The costs of customer energy efficiency programs constitute financial losses to utilities absent cost recovery allowed through utility rates or fees.
2. Reducing energy use reduces utility revenues, but it does not reduce the short-term fixed costs of providing service. This is known as the throughput incentive.
3. Money invested by utilities in energy efficiency programs defers or avoids the need for investments in utility assets that provide financial returns allowed by traditional rate regulation.”
The report goes on to say that, “Regulators, utilities, and stakeholders can overcome these barriers by implementing well-tested policy solutions to align regulation with energy efficiency. Program cost recovery is generally not a major barrier, as regulators recognize this need and readily approve such recovery via rates or fees.”
They are referring to the practice of decoupling revenues from energy consumption — something that Indiana has not yet done. States with decoupling, of which there are now 17, allow their utilities to raise rates to help recoup revenues lost by lower consumption. Neighboring Minnesota’s largest utility, Excel Energy, just asked their state regulators to allow them to decouple.
So there is a solution if Indiana really wants one.
What the legislators said, though, was that it was the consumers that were complaining, not the utilities. According to ACEEE, a number of large-scale customers including Honeywell, General Electric, Siemens, JACO, the Alliance for Industrial Efficiency, the Indiana Distributed Energy Alliance, and the Air Conditioning, Heating and Refrigeration Institute came out in opposition to the bill.
Checking out the campaign contributions to VanNatter and Merritt, we find American Electric Power was one of VanNatter’s top contributors in 2012 and Duke Energy contributed to Merritt’s 2006 and 2008 campaigns. Just saying…
One other thing: According to the National Mining Association, Indiana is the second largest consumer of coal in the U.S. behind only Texas. Last year they burned more than 54 million short tons, making them the seventh largest emitter of greenhouse gases, despite being the 15th largest state in terms of population. Indiana is also the seventh largest producer of coal in the nation, producing roughly 3.6 percent of the national total.
A large-scale effort to reduce consumption would not be at all welcomed by an already-beleaguered coal industry that is well-known for taking matters in their own hands when things are not going the way they want them to.
In 2013, coal-fired plants accounted for 84 percent of Indiana’s electricity. The fact that so much of Indiana’s electricity comes from coal makes it all the more important to aggressively pursue measures to improve efficiency. That’s important to all of us, whether we live in Indiana or not. But based on the experiences of all their neighbors and people all over the world, once they begin this important work, they’ll be glad they did. They’ll be glad for lower electric bills, better air quality, more jobs, and the satisfaction of knowing that they are doing their share in the fight against a global problem.