Greenhouse Gas Reductions from Demand-Side Management

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1 Greenhouse Gas Reductions from Demand-Side Management Control # 722 Melissa K. Antoine Trinity Consultants, 6600 Peachtree Dunwoody Road, 600 Embassy Row, Suite 350 Atlanta, Georgia ABSTRACT This paper discusses greenhouse gas reductions gained through demand-side management programs. Demand-side management programs are designed to educate consumers to reduce energy consumption by improving energy efficiency and modifying energy use levels. These programs conducted by utilities result in decreased amounts of greenhouse gas emissions. However, utilities are often restricted from using these decreases as emissions reductions within greenhouse gas emissions trading programs. This paper explores the possibility of acquiring emissions allowances for successful demand-side management programs, as well as the role these emission reductions play in greenhouse gas emissions registries. In addition, other inherent incentives, as well as those that can be offered by regulatory agencies are discussed. INTRODUCTION As energy use increases and the prospect of energy supply shortages is on the rise, electric utilities are faced with the challenge of effectively meeting the demands of consumers. The obvious reaction to growing demand or supply shortages is to construct new power generating plants. However, this potential solution is time consuming and economically, as well as environmentally, expensive, as new fossil fuel fired power plants will increase the amount of air pollutants, including greenhouse gases (GHG), emitted into the atmosphere each year. Another solution is for utilities to explore ways of reducing electricity demand through demand-side management (DSM) programs. DSM programs include reducing energy consumption, increasing efficiency, or shifting demand to off-peak hours. These programs offer benefits to electric utilities, individual consumers or companies, and the general public. Notably, DSM programs can reduce operating costs for utilities, electricity costs for customers, and improve air quality for the public. Despite such benefits, DSM programs can also be costly for utilities when the capital expenditures of implementing such programs are considered alongside the potential loss in revenue resulting from decreased demand. The question, therefore, is whether sufficient incentives are available to utilities to continue to promote DSM programs. 1

2 DEMAND-SIDE MANAGEMENT PROGRAMS DSM programs have received much attention in the electricity supply industry. Program activities within this sector are designed by utilities to encourage consumers to modify their energy use by promoting energy efficiency and load management. Electric utilities implement energy efficiency programs in a number of ways, often by offering consumers rebates for using more efficient lighting, motors, air conditioning, or other electrical appliances, or simply by educating customers about energy efficiency through television and radio advertisements or brochures included with monthly statements and customer information packets. Unlike these programs, which are designed to lower energy use while maintaining the level of service provided, load management focuses on reducing usage during periods of peak power consumption, or in specific sections of the distribution grid. Load management programs are implemented by charging load tariffs and time-of-use rates. It is important to note that often load management programs are successful in shifting the timing of energy use, but not necessarily in reducing the overall amount of energy consumed. Utilities currently implementing DSM programs that emphasize energy efficiency have had success in reducing GHG emissions. In Montana, the Universal System Benefits (USB) Program put completely into practice by the Montana Power Company in 1999 included home energy audits and weatherization plans, commercial lighting alternatives, and energy appraisals for small businesses. USB educated consumers about energy efficiency and succeeded in reducing energy use and saving money for low-income customers, while reducing GHG emissions at the same time. The Montana Power Company estimates that an energy savings of approximately 29,000 megawatt-hours (MWh) was realized from 1999 to 2000, alone. This energy savings translates into over 4,500 tons (4,082 metric tons) of carbon dioxide equivalent (CO 2 e) emissions that were displaced from the atmosphere. 1 The state of Hawaii, which requires petroleum imports to supply nearly 90 percent of its energy needs, is using DMS programs to reduce energy use and even out daily electricity demand. Weatherization assistance, commercial lighting programs, and load management are a few of the DSM practices applied in the state. One utility promoting DSM programs, Hawaiian Electric Company, estimates a total energy savings of MWh resulting from DSM by An important by-product of this energy savings is the corresponding reduction in GHG emissions. Estimated GHG emissions reductions from this energy savings are approximately 30 tons (27 metric tons) of CO 2 e. This number, however, does not include the potential reduction in transportation emissions associated with the decrease in imports of petroleum. 2 The Energy Information Administration (EIA) of the Department of Energy (DOE) reported that 459 large electric utilities (producing greater than 150,000 MWh of electricity) participating in DSM programs saved a total of approximately 50,600 MWh of energy in This number grew to a total savings of roughly 54,800 MWh by As a result of these energy savings, the utilities participating in the DSM programs also reduced their GHG emissions. 3 2

3 More states and electric utilities are currently using or will implement DSM programs to increase energy efficiency and reduce GHG emissions. In September of 2003, Cinergy Corporation announced its plans to reduce GHG emissions to an average of five percent below 2000 levels during the period from 2010 to Cinergy anticipates spending $21 million on projects, including DSM programs, to achieve the emissions reduction. GREENHOUSE GAS EMISSIONS REGISTRIES AND TRADING SCHEMES GHG emissions are reported and tracked in both emissions trading programs and registries. The fundamental difference between the two is that trading schemes require participants to limit GHG emissions to a certain level, by either rate-based or absolute emission limitations, while GHG registries only require the reporting and certification of GHG emission rates. Emission reductions generated by DSM programs will be discussed in the context of absolute trading schemes, or cap and trade programs, and registries in the following sections. Demand-Side Management and Cap and Trade Programs Cap and trade emissions trading programs are market-based systems that impose a cap on emissions and issue tradable allowances. A specific number of allowances are issued, and, at the end of a given accounting period, each entity under the cap must hold enough allowances to offset its emissions. Cap and trade programs give companies the freedom to comply with their regulated emissions cap in the most economically feasible manner: by reducing emissions to their allowance level, purchasing allowances from other companies that have an excess, or reducing emissions below their allowance level and selling the remaining allowances. The freedom offered by cap and trade programs has proved to be widely successful in the United States SO 2 Allowance program. Emission reductions realized through DSM programs can be quite controversial in cap and trade emissions trading schemes. The possibility exists that two participants in the trading program may claim ownership to these reductions the electric utility that is directly responsible for producing less electricity and the company that reduced its energy consumption thereby indirectly reducing the GHG emissions of the utility. In these instances, double-counting of emissions reductions could occur, which would prove to weaken the market value of allowances or credits. When electric utilities actively promote and consuming companies or individuals participate in DSM programs, the question of who is actually responsible for the resulting emissions reduction grows even more difficult. By promoting DSM programs, utilities are trying to reduce demand for and use of their product, thereby reducing their income corresponding to the foregone electricity sales. However, if consumers do not participate, the energy savings are never realized, regardless of the actions taken by the electricity generators. As a result, both sides have legitimate claims of ownership to the subsequent emission reductions. 3

4 There is no clear-cut, easy answer to the question of ownership of emission reductions resulting from DSM programs. However, when looked at on a project-by-project basis, DSM programs may be more easily analyzed in the scope of GHG emissions trading schemes. Current and future schemes could require a detailed DSM project description from both utilities and participating consumers seeking to gain allowances for DSM programs. On the consumer side, trading programs may require the establishment of a baseline of electricity use and a commitment to reduce consumption by a given amount in a specified period of time. Allowances or credits would only be issued if the company went above and beyond the established reduction targets by consuming even less electricity than anticipated. Therefore, the agreed upon initial reduction would generate no allowances for the electricity-consuming company, and the company would be encouraged to exceed its reduction targets. In the case of electricity generators, the utility would be responsible for producing data sufficient to show that emission reductions were actually realized as a result of implementing DSM programs. This data may include a detailed analysis of the locations the DSM programs were applied and the corresponding energy use patterns in those areas, which may not be easy to track. However, if allowances are to be issued for DSM programs, they must be verifiable to ensure the integrity of the trading scheme and the market value of the allowances. The guidelines established by the trading program would then dictate the amount of allowances to be granted based on the strength of the data provided. The Clean Development Mechanism (CDM) of the Kyoto Protocol is an example of analyzing emissions reductions on a project basis. The United Nations Framework Convention on Climate Change has included potential energy efficiency improvement projects in the CDM program. CDM is defined in Article 12 of the Kyoto Protocol as an instrument designed to aid required parties in attaining compliance with emission limitations and other organizations not included in Annex I with sustainable development and promoting the overall goals of the Protocol. 4 Annex II to the Conference of Parties Decision 21/CP.8 defines energy efficiency as the improvement in the service provided per unit power and states that the Executive Board shall assemble an inventory of project activities that would qualify as energy efficiency improvements. Annex II also states that demand side projects may be consider as a CDM given that an overall reduction of less than 15 gigawatt hours (GWh) is realized by the project activities. 5 Demand-Side Management and Greenhouse Gas Registries GHG registries offer companies a way to track their annual GHG emissions by calculating and reporting emissions each year. Both electricity generators and end-users are encouraged to participate in GHG registries. GHG emissions associated with electricity consumption are included as indirect emissions for end-users of electricity and as direct emissions from stationary combustion for electric utilities. Electric utilities that promote DSM programs may report a decrease in direct GHG emissions, but only if the total amount of electricity produced was lower than the 4

5 preceding year. From a consumption standpoint, companies successfully implementing DSM programs to increase efficiency and reduce energy use would absolutely report lower indirect emissions based on the reduction in consumption. As is the case with trading schemes, analyzing GHG reductions resulting from DSM programs may be easier to quantify on a project basis within a registry. DSM programs are recognized as emissions reduction projects in the United States Voluntary Reporting of Greenhouse Gases Program established by the Energy Policy Act of To support the voluntary reporting program developed under Section 1605(b), the Energy Information Administration (EIA) of the Department of Energy (DOE) generated guidance documents on sector-specific reporting issues. These supporting documents contain guidance on reporting GHG emission reductions for various sectors, including the electricity supply industry, and contain instruction on how to account for emission reductions from DSM programs. 6 Entities reporting GHG emissions quantities and reductions under the electricity sector include energy generating facilities, as well as consumers. Since the participants in GHG registries include both power producers and end-users, it is easy to conclude that GHG emissions from electricity are double-counted if both the company using the electricity and the utility supplying it are registry members. Likewise, reductions in GHG emissions resulting from DSM programs may also be double-counted. However, since emissions are only reported and not traded, double-counting is not a hindrance to GHG registries. Registries offer each participant a way to track GHG emissions increases and decreases over time. Caution must be exercised when using registries to gauge regional increases and decreases in GHG emissions. OTHER INCENTIVES FOR UTILITIES TO PROMOTE DEMAND- SIDE MANAGEMENT PROGRAMS Aside from the possibility of gaining emission reduction allowances for DSM programs, utilities have other incentives to promote such programs. Successful DSM strategies can mitigate the need for companies to invest in new energy capacities, thereby saving utilities the capital and operating costs of new power plants, which are substantial. DSM programs can reduce the operating costs of existing power plants, as less fossil fuels are required to be purchased. Load management DSM programs give the utilities greater reliability that existing power generation and distribution systems can handle peak loads. Since DSM programs effectively reduce the amount of electricity sold by utilities, thereby reducing their revenues, utilities implementing DSM programs can seek to recover program costs and net loss of revenue from regulators or ratepayers. Program costs include the actual amount of money a utility spends on promotion and implementation of DSM programs, while net loss of revenue considers both the program costs and the potential savings due to variable costs, such as the avoided fossil fuel purchases. Regulators may offer tax incentives or shared-savings programs, which are designed to allow the utility to recover a portion of the costs of DSM programs, to electric utilities. As an alternative, utilities may charge all customers a tariff that offsets 5

6 the costs of DSM programs. In this type of system, the benefits and costs of the DSM programs should be tracked and consumers reimbursed if the tariffs outweigh the implementation costs. At a minimum, utilities are finding that DSM programs fair positively in marketing campaigns. The promotion of DSM demonstrates that an electric utility is a socially responsible organization that is seeking ways to reduce the electricity costs of its consumers, as well as reduce emissions of greenhouse gases and other harmful air pollutants. DSM programs can also translate into favorable ratings in the emerging schemes designed to rank companies based on sustainability, such as the Dow Jones Sustainability Indexes launched in CONCLUSION The benefits of demand-side management programs are plentiful. Most obvious, the reduction in demand for GHG producing services or activities reduces the quantity of GHG emissions. On the consumer-side, implementation of DSM programs, such as efficient lighting alternatives and proper weatherization of homes and buildings, has increased residential and commercial energy efficiency, resulting in lower electricity costs for those who participate. Post-deregulation, consumers have a choice of who provides their electricity service. Although utilities incur both the capital costs expended to promote DSM programs and the loss of potential revenue associated with the reduction in consumer demand, potential rewards of DSM programs are also available to them. DSM programs offer electric utilities a means to avoid the costs of constructing new power plants while, at the same time, reduce the possibility of electricity supply shortages. However, one potential incentive for implementing DSM programs, the possibility of gaining tradable allowances under GHG emissions trading programs, is also quite controversial. The difficult question of ownership of the emission reductions must be settled in the design of the emissions trading program in order to avoid the possibility of issuing redundant allowances, which would effectively weaken the trading market. Solutions to this problem can include the requirement that utilities provide specific DSM project descriptions and subsequent data to validate emission reductions, that consumers establish a baseline of electricity use and commit to a certain level of reductions before gaining emissions allowances, or that utilities and consumers agree to divide the potential emission allowances before DSM programs are implemented. Including both utility as well as consumer actions to reduce electricity demand in GHG emission trading schemes will encourage participation in the trading schemes by various companies, which can help strengthen the trading program. Overall, the benefits of including DSM programs in emissions trading markets should be further analyzed with respect to utilities, consumers, and the success of the trading program. 6

7 REFERENCES 1. Pew Center on Global Climate Change, (accessed January 2004). 2. State of Hawaii, (accessed January 2004). 3. Energy Information Administration, (accessed January 2004). 4. Kyoto Protocol to the United Nations Framework Convention on Climate Change, Third Session of the Conference of Parties, Kyoto, Japan, December 11, United Nations Framework Convention on Climate Change, Eighth Session of the Conference of Parties, First Report of the Executive Board of the Clean Development Mechanism ( ), pgs Electricity Supply Sector Supporting Documentation to the General Guidelines for the Voluntary Reporting of Greenhouse Gases under Section 1605(b) of the Energy Policy Act of 1992, Energy Information Administration of the Department of Energy. 7

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