What a National Energy-Efficiency Policy Would Do for the US
A proper national energy-efficiency policy would unleash one of the greatest economic growth spurts for the US and the world.
By: Greg Puschnigg, CEO and Founder
Background and History:
There is almost a direct correlation between the energy consumed by a nation and the Gross Domestic Product (GDP) for that nation. Most people understand that the more energy you have, the more you can do per person, increasing the basic output of people and therefore the nation’s GDP. It also makes sense to people that energy should not be wasted as this, in effect, is lost economic wealth/money. Furthermore, the relationship between money (wealth) and energy is so strong that when the US went off the gold standard, it did so by requiring every barrel of oil sold around the world to be purchased with a US dollar. That’s right, every nation must trade their currency in for a US dollar to buy a barrel of oil. That is why the US dollar is known as the “Petrodollar” around the world. In reality, the US dollar went off the gold standard and on to the “black gold” standard.
Fast forward to today: we are fighting never-ending wars in the Middle East to control one of the world’s main energy supplies, which maintains the value of the US dollar. Trillions of US tax dollars have been spent fighting these wars to control this energy wealth and protect the US dollar. Therefore, the hidden costs of barrels of oil from overseas is far higher as these trillions of dollars spent on Middle Eastern wars should be spread over the cost of these barrels , dramatically raising the cost of each one. In addition, there are other hidden costs from the pollution and environmental impact from burning these fossil fuels. We will not dwell on these other hidden costs as they are too politically sensitive and instead focus on the economic impacts from energy that everyone can agree on that a national energy policy, specifically relating to energy efficiency and distributed energy resources, would target. To increase growth and wealth, we must increase the consumption of energy per person to increase or decrease the output of energy consumed per person to create new productivity gains per person and therefore economic wealth. We can consume more fossil fuels which have hidden costs dragging productivity gains per person and have been a marginal return on investment, or increase the output or reduce cost per person for each unit of energy consumed. This is energy efficiency.
Before we discuss what is needed in a national energy-efficiency policy, a simple understanding of the current business model of regulated electrical utilities will help underscore the need for such a policy. The utilities are also known as the supply side of the energy markets. Electric utilities provide electricity to all their customers. All of their operating costs are passed through to the end customers, and the utility only makes money on fixed guaranteed returns on their investment for their capital for generating power and providing it to their customers. The more capital spent on producing more power, the more the utilities can earn. This return on investment is set by the Public Utility Commission (PUC) of each state. Therefore, these utilities have zero incentive to reduce energy consumption as it takes money out of their pockets. The PUCs around the country are trying to change this model and incentives; the PUCs decided to place approximately a 1% tax on everyone’s electric bill and allow the utilities to provide energy-efficiency rebates to their customers for solutions saving energy.
This has good intentions but again the utility only makes money for their investors by growing the energy consumption to increase their revenues and therefore have zero incentive to provide a better solution to their customers. Because of this misalignment of utility incentives, the PUCs should adopt a policy that allows utilities to invest their capital in generating power with traditional means at the existing fixed rate of return of X, and allow utilities to receive a 2x the return for investments that reduce energy consumption to provide the same quality of service. This would allow the utilities to invest in areas that align with end customers, governments, and other societal benefits. Two-thirds of the energy is lost in transmission of power generation over the electrical lines to the consumer. Investment in a grid that has energy produced closer or at the end customer’s premises is more efficient than transmission of power over electrical lines. Having incentives for many clean power solutions, such as solar, battery storage, and wind, at the premises will reduce these transmission losses, provide energy resiliency and remove many of the hidden costs of fossil fuels.
Although there are many great benefits by affecting the supply side of the energy markets, the real value creation will be affecting the demand side of the energy markets, also known as energy consumption by the end customer. There is nothing better than turning things off to save energy. By doing so, residential and commercial customers save money that goes directly to their disposable income for residents and to the bottom line of business owners and operators. Energy-efficiency savings is so big, it will provide a two-one impact over solar, wind, and battery storage combined! Therefore, a national policy needs to be created for energy efficiency to pick the lowest hanging fruit by reducing the energy consumed per person, delivering the same output by increasing the productivity gains per person and profits per person.
Currently the nation’s tax codes, rebates, electrical codes, laws, etc. support evolutionary change with many different market drivers fighting against each other. A revolutionary approach connected with a holistic view approach is needed to look at the entire value system of the electrical grid and where efficiency gains can be implemented. If you just look at our nation’s buildings, by implementing simple smart controls inside buildings where 73% of our electricity is consumed would save approximately $60B a year according to the DOE. The DOE also has shown that each building could save 50% of their energy costs with a complete demand side energy management system. For building owners, every dollar saved in operating costs equates to approximately $10 increase in building value. Following this standard, if a building owner reduces their energy bill by $100K per year, the affected building’s value would be up by $1M.
With a national energy-efficiency policy, building owners see a major cost saving and increase their profits. Utilities see bigger cost savings by reducing their peak demand costs, providing a greater profit for their investors under a new 2x return on investment stated earlier for utilities. Consumers see savings for their household, and because energy-efficiency savings creates more profits for businesses, they should be able to increase their pay. Energy markets can be moved from a centralized generation using fossil fuel energy to decentralized clean renewable energy. Society then sees a reduction in pollution which lessens climate change impact. Millions of good paying jobs for the electrical and HVAC trades and new construction will be created overnight, replacing the old electrical infrastructure in buildings with smart, cyber secure, and energy resilient solutions as well as microgrids and nanogrids. Investment in new technologies will also accelerate, creating even better-paying jobs. Cyber security of these solutions must be a priority, but we will save this for another day.
With all of the great benefits from energy efficiency, it is unrealistic to think fossil fuels will go away in the foreseeable future. By trying to force this change through policy shifts via affecting the supply side of the energy markets, we would cause more harm than good. Instead, we should focus on the demand side of energy efficiency, and in turn this will cause changes to the supply side. One exception that should be considered is a tax should be applied to cover the war costs in the Middle East for all the energy brought to the US from there. This would in turn provide the real costs of energy from the Middle East and make US oil production much cheaper in relative comparison and create more jobs.
What is Needed in a National Energy-Efficiency Policy:
Further Deregulation of energy markets
- Accelerate deregulation on all energy markets.
- Incentivize demand response investments for utilities and other distributed energy resource investments that can lower peak demand costs for utilities.
- In general, incentivize the move from a centralized to decentralized power generation (microgrids and nanogrids).
- $60B per year in energy savings can be achieved by implementing simple smart controls in buildings according to DOE.
- 80% of US buildings do not have energy management or controls according to the DOE.
- Current utility rebate programs incentivize their current business model and do not support the rapid transitioning to a decentralized power grid with renewable energy. It will take a hundred years to gain the economic gains from energy efficiency as is. Instead, a change to the utility rebate program of providing rebates for energy efficiency by giving the utilities bigger credit/incentives for solutions that provide energy efficiency AND intelligent control, so these devices can be used to reduce peak power by providing virtual power to the utility. This intelligent control providing virtual power will be a huge driver for utilities as it more than offsets the loss from energy-efficiency devices.
- $1.9T to be spent worldwide on distributed energy resources and energy-efficiency solution over the next decade if a national energy-efficiency policy is created by aligning financing, codes, regulatory laws, and tax incentives.
- Again, Cyber security for these solutions are a priority and will be discussed another day.
- The latest building electrical codes do not support the latest technologies to move to a decentralized power grid with renewable energy. For example, new electrical codes do not support smart plugs because they say they are not permanently installed. However, both UL and the utility rebate programs consider mounting a screw in the smart plug to the face plate to make it permanently installed. The building codes are limiting technical innovation adoption to reduce energy consumption, and they should not be allowed to conflict with state laws and regulations that require energy efficiency. Retrofit solutions should be introduced as new construction solutions are needed. Technology companies need to be included on these panels, or it will be another 100 years before any technical innovation comes to the outlet or light switch.
- Regulation should be used if certain goals are not met but not as the forcing function for change.
- Establish State and Federal requirements for incentives and goals for all parties to consume less energy.
- Energy efficiency will have a two-to-one bigger impact than solar, wind, and power storage combined; our policies should focus on the demand side, not the supply side.
- Unlike solar, wind, and power storage, energy efficiency affects the demand side of energy. Reduce demand, and a reduction in supply will follow.
- Implementation of tax incentives like those used early on by the solar industry would be helpful in moving the market in the right direction, especially for smaller or private investments.
- Current financing (such as PACE) supports only large projects with long paybacks.
- Incentives are needed for private investment and smaller investment amounts. Financing is needed for low-hanging fruit opportunities with rapid payback that can also affect human behavior.
In summary, a national policy that focuses on the demand side of the energy markets by creating a policy for energy efficiency will have a far greater impact and success than the policies that have been used to force change through the supply side alone. There are far less special interest involvements on the demand side of the equation, and the economic gain would spur an economic boom in the US for a decade or more to replace the 100-year-old electrical infrastructure inside our buildings and homes today.