A Policymaker's Guide to Incorporating Existing Homes Into Carbon Reduction Strategies and Clean Power Plan Compliance

By Kara Saul Rinaldi and Elizabeth Bunnen for Home Performance Coalition

In addition to being a cost-effective option for CPP compliance, energy efficiency also helps states meet other air quality and clean energy goals, reduce consumers’ energy bills, create local jobs, and increase energy reliability.

Introduction

Residential energy efficiency is a key part of the solution to address U.S. carbon emissions. America’s aging and growing housing stock is a critical part of U.S. energy demand, with residential buildings accounting for 20 percent of U.S. carbon emissions.¹ Residential energy efficiency can play an important role as a proven, low-cost, and accessible way to help meet carbon emission reduction goals under the Clean Power Plan, as well as requirements under other state, local, or utility carbon emission reduction frameworks. Utilizing energy efficiency to meet carbon targets requires ample consideration and planning, as compliance options available for the residential sector are not always as straightforward as other energy efficiency or renewable energy approaches. This paper aims to provide policymakers with actionable recommendations on carbon emission reduction goals and compliance pathways of the U.S. Environmental Protection Agency (EPA)’s Clean Power Plan (CPP), as well as examples of where energy efficiency is applicable and the residential sector might have a role in meeting carbon emissions targets.

A. Overview of Final Clean Power Plan

In August 2015, the EPA released the final Clean Power Plan (CPP).² Adopted pursuant to EPA’s authority under section 111(d) of the Clean Air Act, the CPP establishes state-specific carbon dioxide (CO₂) emission reduction goals³ and is projected to reduce carbon emissions from the power sector 32 percent from 2005 levels by 2030.⁴ While EPA gave each state a distinct goal for cutting CO₂ emissions, each state will decide how to achieve that goal. States can switch from coal-burning power plants to existing natural gas, expand renewables or nuclear, employ a wide array of energy efficiency policies and measures, engage in carbon trading – individual states can decide.

Energy efficiency should play a very important role in state compliance with emissions targets as it will reduce the overall cost and achieve reductions sooner. EPA supports the use of energy efficiency as a proven, cost-effective, and widely available compliance option and, according to a recent ACEEE analysis, energy efficiency can get most states more than halfway to their emissions targets.⁵ In addition to being a cost-effective option for CPP compliance, energy efficiency also helps states meet other air quality and clean energy goals, reduce consumers’ energy bills, create local jobs, and increase energy reliability.

B. Energy Efficiency in the Clean Power Plan

EPA explicitly recognizes energy efficiency as a proven, cost-effective, and widely-available compliance option in the Clean Power Plan.6 In fact, as explained in Section II.C of this paper, EPA even included an incentive program to stimulate early investment in energy efficiency in low-income communities.

• The final CPP identifies a variety of energy efficiency measures, programs, and policies that can count toward compliance. Examples include:
• Energy efficiency measures that reduce electricity use in residential and commercial buildings, industrial facilities, and other grid-connected equipment;
• Energy efficiency measures installed through an energy efficiency deployment program (e.g., appliance replacement and recycling programs and behavioral programs) administered by electric utilities, state entities, and other private and non-profit entities;
• State or local requirements that result in electricity savings, such as building energy codes and state appliance and equipment standards; and,
• Energy efficiency measures installed as the result of individual projects, such as those implemented by energy service companies (ESCOs).

In addition, energy efficiency is promoted as a key compliance mechanism for states in many of the supporting documents EPA released – including the Demand-Side Energy Efficiency Technical Support Document⁷ and the Clean Power Plan Key Topics and Issues Factsheet⁸ – and is also a component of the final rule’s Regulatory Impact Analysis.⁹

Specific reference to energy efficiency can be found in four major places in the CPP:

1. Emissions Guidelines¹⁰– explicitly states that energy efficiency projects may be eligible to receive CPP credits, describes how energy efficiency projects may receive those credits, and outlines the general requirements for measuring and verifying savings;
2. Proposed Federal Plan and Model Trading Rules¹¹ – outlines presumptively approvable EM&V approaches and presents a framework for the Clean Energy Incentive Program (CEIP), a voluntary early-action program associated with the CPP;
3. Draft EM&V Guidance for Demand-Side Energy Efficiency¹² – outlines applicable guidance and recommendations for how to measure energy efficiency savings; and,
4. Clean Energy Incentive Program (CEIP) Proposed Rule¹³ – builds upon the framework laid out in the Proposed Federal Plan and presents additional details on how states can use energy efficiency to get early-action credits through this voluntary program.

Although the Emissions Guidelines are final, EPA is currently working to finalize the Proposed Federal Plan and Model Trading Rules, EM&V Guidance, and CEIP Proposed Rule. The public comment period for both the Proposed Federal Plan and Model Trading Rules and the Draft EM&V Guidance ended January 21, 2016. The Federal Plan would establish emission reduction obligations for affected power plants in any state that does not submit an approvable compliance plan. It includes recommended energy efficiency EM&V practices that would be employed under the Federal Plan.

The EM&V practices laid out in the Proposed Federal Plan are considered“presumptively approvable” for states to include in their own compliance plans.¹⁴ Thus, states looking for direction should understand that if they include the EM&V methods the Proposed Federal Plan laid out in their state compliance plan, they would be approved by EPA. Any alternative EM&V approaches included in a state’s compliance plan must be “functionally equivalent” to the presumptively approvable provisions in the Federal Plan.¹⁵ It should be noted that EPA has stated it is open to new approaches to EM&V. In the residential sector, technology and policy are evolving very quickly, and, thus the opportunity for advanced EM&V (such as smart grid technologies) may be an alternative for states to consider.

EPA has also published a Draft EM&V Guidance document for demand-side energy efficiency. This guidance is not a formal rule, but it provides supplemental information to help states and energy efficiency providers adhere to the EM&V requirements in the Emission Guidelines and the recommendations in the Proposed Federal Plan. Contents include baseline definitions, applicable EM&V methods, options for using industry standard protocols and guidelines, and other topics necessary for successfully quantifying and verifying savings. Again, new technologies that would supplement and enhance EM&V methods can be included in the final EM&V Guidance. It is important to note that EPA’s approach to EM&V – including the regulatory provisions included in the Proposed Federal Plan and Draft EM&V Guidance – encourages the use of existing protocols and methods and leverages best practices already in use.

Clean Energy Incentive Program¹⁶

EPA also proposed an optional Clean Energy Incentive Program (CEIP) to provide states with additional incentives for early action emissions reductions that reduce end‐use energy demand during 2020 and/or 2021.¹⁷ The CEIP is essentially a “matching fund” program to incentivize states to invest early in renewable energy and low-income community energy efficiency and solar.¹⁸ Energy efficiency projects in low-income communities are eligible for “double” matching credits under the CEIP. For example, for each 2 MWh of avoided generation achieved through eligible demand-side energy efficiency projects in low-income communities, the state will award 2 early action credits (either allowances or ERCs, depending on whether the state is taking a mass-based or rate-based approach), and EPA will award an additional 2 matching credits, for a total of 4 credits for every 2 MWh of savings.¹⁹

EPA has not yet announced the deadline by which states must indicate their intention to participate in the CEIP. Originally, states were required to indicate their intention to participate by September 6, 2016; however, in light of the Supreme Court stay, EPA removed that deadline. In the CEIP Proposed Rule, EPA says it will provide further direction on timing requirements once litigation surrounding the CPP has been resolved.

EPA solicited public comment on the CEIP Proposed Rule (published in June 2016) through November 1, 2016, and is in the process of receiving and reviewing those comments. See Section II.C for additional details on the CEIP Proposed Rule and eligibility requirements for energy efficiency projects.

C. Current Legal Status and Implications

The Clean Power Plan is being challenged by twenty-eight states as well as several utility and industry groups.²⁰ The numerous petitions against the rule have been consolidated into a single case before the D.C. Circuit Court of Appeals.

On February 9, 2016, the Supreme Court overturned a previous D.C. Circuit Court of Appeals decision to deny the petitioners a stay of the rule until litigation concluded. The 5-4 decision from the Supreme Court essentially grants the stay the petitioners originally sought and pauses CPP enforcement until litigation concludes.²¹

While the Supreme Court stay halts enforcement of the CPP, it does not prevent continued planning for the rule.²² EPA has stated numerous times that it will continue many aspects of its work on the CPP – including reviewing public comments on and developing final versions of the Proposed Federal Plan and Model Trading Rules, Draft EM&V Guidance, and CEIP – and will also continue to provide guidance to any states seeking this technical support. Assuming the CPP is upheld by the Supreme Court, the
practical implication of the stay for planning purposes is the delayed deadline for submission of state compliance plans. In April 2016, EPA Administrator Gina McCarthy said that the EPA will delay the original September 2018 final deadline for states to submit compliance plans and will not enforce a September 2016 deadline for states to submit initial compliance plans.²³ As previously mentioned, EPA has also removed the deadline by which states must indicate their intention to participate in the CEIP. EPA has said it will provide further direction on this deadline once litigation surrounding the CPP has been resolved.

State responses to the Supreme Court stay vary, but many state regulators have indicated that they will continue to plan for a future in which carbon is regulated, whether by the CPP or another regulation. State regulators and other stakeholders, such as utilities, are often tasked with making 20-, 30-, even 40-year plans or investments, and there is a general consensus that cutting carbon emissions will be an inevitable requirement over that time period; thus, many states are planning for the eventuality.

State regulators²⁴ also recognize the inherent interconnectedness of the CPP and other regulations pertaining to clean air and clean energy.25 This is even true in states that have publicly stated that they will stop planning for the CPP in light of the Supreme Court stay.²⁶ Georgia, for example, is one of the states that has said it ceased planning entirely. But, while Georgia’s Environmental Protection Division may have stopped all of its work on the rule, electric regulators in the state must still – as part of their normal course of business - review Georgia Power Co.'s integrated resource plan (IRP), which proposes increased use of renewables and energy efficiency – both of which will help the state comply with the CPP.²⁷ IRP and similar planning is happening not just in Georgia, but in many states across the country, and good IRP planning requires at least some level of carbon planning. The same is true for Public Utilities Commission (PUC) rate case planning, as well as ozone pollution and regional haze planning.

Wisconsin is another state that has said it will stop planning for the CPP in light of the Supreme Court stay. The state’s governor issued an executive order prohibiting state officials from planning.²⁸ That said, the Wisconsin Public Service Commission is reportedly monitoring planning by the Midcontinent Independent System Operator (MISO), a grid organizer, for both the CPP and a more generic carbon regulated future.²⁹

It is important to note that, in spite of the Supreme Court stay, almost all states continue to plan in some way for some kind of carbon regulation. Energy efficiency – a proven, cost-effective, and widely-available tool – will be essential in that planning. Indeed, continuing to develop and implement energy efficiency policies and programs is a 'no regrets' strategy -- that is, implementing energy efficiency now will help states meet future CPP compliance targets or other carbon regulation requirements, while delivering many other immediate benefits.

1. Annual Energy Outlook 2016. U.S. Environmental Information Administration. https://www.eia.gov/forecasts/aeo/data/browser/#/?id=2-AEO2016cases=ref2016~ref_no_cpp&sourcekey=0
2. Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units, 80 Fed. Reg. 64668 (Oct. 23, 2015). It should be noted that the Supreme Court issued a stay of the CPP in February 2016. The stay puts enforcement of the CPP on hold until litigation concludes; however, EPA and many states continue CPP planning and preparation. For more information on the stay and its implications for states, see Section I.C.
3. The final CPP establishes CO₂ emission rate goals and mass equivalents for 47 states. Individual state targets are based on national uniform “emission performance rate” standards (pounds of CO₂ per MWh) and each state’s unique generation mix. Vermont and Washington, D.C. are exempt because they do not have any large fossil fuel or electric power plants. Alaska and Hawaii are also not currently covered under the rule because of their unique grid and energy infrastructure. EPA has said that it will eventually release emissions performance rates for Alaska and Hawaii. EPA has released state-specific factsheets that outline emissions goals and compliance considerations for each state. These state-specific factsheets are available at https://www.epa.gov/cleanpowerplantoolbox/cleanpower-plan-state-specific-fact-sheets.
4. For more information on the CPP - including a rule summary, history, factsheets, and resources for states – visit: https://www.epa.gov/cleanpowerplan/clean-power-plan-existing-power-plants.
5. ACEEE. 2016. Energy Efficiency Lowers the Cost of Clean Power Plan Compliance. http://aceee.org/sites/default/files/ee-lowers-cost-cpp-0316.pdf
6. In the proposed rule, EPA included energy efficiency as one of four “building blocks” for determining the “best system of emission reduction” (BSER), as required under section 111(d) of the Clean Air Act. In the final rule, however, EPA omitted energy efficiency as a “building block.” It is important to understand that this change does not have any actual impact on the role energy efficiency can play in state compliance with CPP goals. The building blocks are only relevant for EPA’s development of state emission reduction targets. They are irrelevant for compliance and are irrelevant to consideration of energy efficiency as a compliance mechanism. A state may use some, all, or none of the building blocks in any proportion to achieve compliance.
7. Demand-Side Energy Efficiency Support Document (August 2015) is available at https://www.epa.gov/sites/production/files/2015-11/documents/tsd-cpp-demand-side-ee.pdf (herein referred to as “Draft EM&V Guidance document”).
8. Key Topics and Issues Fact Sheet (August 2015) is available at https://www.epa.gov/site/production/files/2015-11/documents/cpp-key-topics.pdf.
9. Regulatory Analysis for the Clean Power Plan Final Rule (August 2015) is available at https://www.epa.gov/sites/production/files/2015-08/documents/cpp-final-rule-ria.pdf.
10. See 40 C.F.R. § 60.5805 for requirements of ERC issuance and 40 C.F.R. § 60.5830 for an explanation of how savings are to be measured and verified.
11. Federal Plan Requirements for Greenhouse Gas Emissions From Electric Utility Generating Units Constructed on or Before January 8, 2014; Model Trading Rules; Amendments to Framework Regulations; Proposed Rule, 80 Fed. Reg. 64,996 (October 23, 2015) [herein referred to as “Proposed Federal Plan”]. It should be noted that the rate-based Federal Plan, as currently proposed, does not explicitly include energy efficiency. HPC and many others have advocated for the inclusion of energy efficiency in any final rate-based Federal Plan, and the guidance in this report is structured accordingly.
12. Evaluation Measurement and Verification (EM&V) Guidance for Demand-Side Energy Efficiency (EE). Draft for Public Input. August 3, 2015. https://www.epa.gov/site/production/files/2015-08/documents/cpp_emv_guidance_for_demand-side_ee_-_080315.pdf.
13. Clean Energy Incentive Program (CEIP) Design and Implementation, Docket ID No. EPA-HQ-OAR-2015-0734, 81FR 42939. http://www.regulations.gov/#!docketDetail;D=EPA-HQ-OAR-2015-0734. Additional information and resources on the CEIP are available at https://www.epa.gov/cleanpowerplan/clean-energy-incentive-program.
14. The Proposed Federal Plan also includes “presumptively approvable” Model Trading Rules for complying with both a rate-based limit and a mass-based limit that states could adopt to meet their obligations under the CPP. EPA is expected to finalize one of these options - the rate-based Model Trading Rule or the mass-based Model Trading Rule – as the approach it will use when imposing the Federal Plan for any states that fail to submit an approvable state plan.
15. 80 Fed. Reg. 64,996, pages 185-186.
16. Clean Energy Incentive Program (CEIP) Design and Implementation, Docket ID No. EPA-HQ-OAR-2015-0734, 81FR 42939. http://www.regulations.gov/#!docketDetail;D=EPA-HQ-OAR-2015-0734. Additional information and resources on the CEIP are available at https://www.epa.gov/cleanpowerplan/clean-energy-incentive-program.
17. EPA is proposing to implement the CEIP as part of the Federal Plan, which will be implemented in states that do not submit an approvable compliance plan. For states in which the Federal Plan is not implemented, the CEIP is voluntary.
18. The EPA matching pool will be equivalent to 300 million short tons of CO₂ (300 million allowances or 375 million ERCs). For additional details on the matching pool and how EPA is proposing to divide it between low-income community projects (which include energy efficiency and solar projects) and renewable energy projects outside of low-income communities, see EPA’s factsheet on the CEIP Proposed Rule, available at: https://www.epa.gov/sites/production/files/2016-06/documents/fs-ceip-proposal-061616.pdf
19. Proposed allocation amounts (in terms of both allowances and ERCs) for each state under the CEIP Proposed Rule are available at https://www.epa.gov/sites/production/file/2016-06/documents/state-bystate_reserve_tables.pdf.
20. There are also many states that are supporting EPA in the case before the D.C. Circuit Court. For a comprehensive list of states, cities, industry groups, and other actors that have officially taken sides in the judicial review process, see E&E’s Power Plan Hub “Battle Lines” page: http://www.eenews.net/interactive/clean_power_plan/fact_sheets/legal_battle_lines
21. On May 16, 2016, the D.C. Circuit Court rescheduled oral argument - originally scheduled for June 2nd before a three judge panel - to a September 27 en banc review before all the justices on the court. With the new hearing date, it is likely that a decision will come in early 2017. After the D.C. Circuit Court issues its ruling, the Supreme Court is expected to take up the case.
22. If the court had wanted to completely stop EPA from helping states move ahead with their own implementation plans, it could have issued an injunction instead of a stay, blocking all activity rather than only the deadlines that occur during the stay.
23. As of June 2016, EPA has not announced a revised deadline for state compliance plans.
24. In April 2016, fourteen states asked EPA for additional guidance on coordinating CPP compliance with other rules affecting power sector, establishing emissions trading programs, verifying energy efficiency, and the Clean Energy Incentive Program. These fourteen states (California, Colorado, Connecticut, Delaware, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Oregon, Rhode Island, Vermont, Virginia and Washington) are supporting the EPA in its legal defense of the rule.
25. Energy efficiency can help states comply with state clean air strategies and regulations, as well as federal clean air requirements, such as the National Ambient Air Quality Standards. According to the Regulatory Assistance Project, energy efficiency can reduce ammonia (NH₃), carbon dioxide (CO₂), carbon monoxide (CO), heavy metals (HM), methane (CH₄), nitrogen oxides (NO_x), nonmethane volatile organic compounds (NMVOC), primary particulate matter (PM), polycyclic aromatic hydrocarbons (PAH), and sulfur dioxide (SO₂).
26. For updated information on where each state stands in the planning process (e.g., continuing planning in light of the stay, assessing, or suspending until litigation concludes), see E&E’s Power Plan Hub “Supreme Court Stay Response” at http://www.eenews.net/interactive/clean_power_plan#planning_status_chart.
27. http://www.eenews.net/stories/1060036323?utm_content=buffer8930autm_medium=social&utm_source=twitter.com&utm_campaign=buffer
28. Executive Order #186, Relating to a Prohibition on Implementing EPA Regulations Pending Completion of Federal Judicial Review. February 15, 2016.
29. http://www.eenews.net/stories/1060036323?utm_content=buffer8930autm_medium=social&utm_source=twitter.com&utm_campaign=buffer