This document discusses energy savings credits (ESCs) which are intended to allow trading of energy efficiency credits for regulatory compliance or in voluntary markets. It outlines some potential benefits of ESC trading such as reducing compliance costs and targeting resources to more valuable efficiency opportunities. However, it notes that ESC trading in compliance markets has been limited so far. Several issues are discussed that could limit the realization of potential benefits from ESC trading, including weak energy efficiency resource standards, transaction costs, uncertainty in savings estimation, and lack of rigorous evaluation, measurement and verification protocols.

1. Alliance to Save Energy April 2010 Energy Savings Credits: Are Potential Benefits Being Realized?

2. Project Report Energy Savings Credits: Are Potential Benefits Being Realized? By Joe Loper, Steve Capanna, Rodney Sobin and Tom Simchak Supported by a U.S. Department of Energy State Energy Program–Special Projects grant through the Penna. Dept. of Environmental Protection. Additional support from the Kresge Foundation and the Sea Change Foundation. Companion report: Scaling-Up Energy Efficiency Programs: The Measurement Challenge

3. Overview Energy Efficiency Resource Standards (EERS) and related standards What they are and their growing use Energy Savings Credits (ESCs) For regulatory compliance & voluntary markets Potential advantages of trading Trading issues Importance of Evaluation, Measurement and Verification (EM&V)

5. EERS/Related Standards Some states (e.g., MA , WA) require electric utilities to pursue all cost-effective efficiency options Over 20 states have enacted an EERS or related standard Potential for a federal EERS (as part of a national RES or Clean Energy Standard): American Clean Energy and Security Act (“ACES”, aka Waxman-Markey) includes a 20% RES by 2020 with EE eligible for 8% American Clean Energy Leadership Act (ACELA) includes a 15% RES by 2020 with EE eligible for 4%

6. EERS Often utilities are the program administrators for energy savings programs to meet EERS But sometimes third parties may be contracted to do so (e.g., Efficiency Vermont) Or there can be multiple administrators (e.g., NY State Energy Research & Devt Authority and utilities in NY) Some states finance programs through a public benefits fund (PBF)--funded by a small charge on electric bills Structures vary significantly as do roles of utility commissions, state energy offices, other agencies, utilities, and third party efficiency providers

7. Energy Savings Credits In states with RESs that include energy efficiency (EE), the energy savings credits (ESCs) may be equivalent to renewable energy credits (RECs) aka green tags States with stand-alone EERS have separate credits for energy savings Voluntary market appears to be modest Voluntary carbon offsets can include EE projects Private firms are trying to market voluntary ESCs, e.g., “white tags” (trademark of Sterling Planet)

8. ESC Trading System Elements of an ESC Trading System include: Implementation of EE measures Measurement of energy savings Verification and certification Issuance of credits Tracking of credits Price determination

9. ESC Trading: Potential Benefits Reduce EERS compliance costs Buy least expensive (most cost-effective) ESCs: it may be less expensive to buy energy savings from other providers than for a utility or other regulated entity to achieve energy savings through its own programs Target resources to most valuable EE opportunities Can target ESC purchases from projects that help achieve other objectives, e.g., reduce air pollution or grid congestion Generate revenues for additional EE ESCs sales revenues may fund more EE projects Enhance transparency and credibility of EE programs Increased scrutiny as compliance and money at stake

10. Status:ESC Trading in the Market Limited ESC trading in compliance markets so far Pennsylvania Electricity supply options dominate the category that includes EE No EE projects have been credited to date PA has created a separate EERS—electric utilities must achieve goals within their service territories Nevada RES—EE portion of RES oversubscribed already Connecticut EERS— Only state with significant ESC trading Oversupply of ESCs Dominated by Public Benefit Funded program administered by two main electric utilities Third party EE suppliers find it hard to participate in market. No interstate ESC trading for EERS to date

11. ESC Issues Currently unclear if potential benefits of ESC trading are being realized Possible barriers to ESC trading: Weak EERS Does EERS drive savings beyond business-as-usual Trading makes a weak EERS weaker Giving away capital and jobs Possible political concern with buying ESCs from elsewhere—the EE investment and jobs go elsewhere Transaction costs—certification, tracking and trading Uncertainty of savings estimation

12. ESC Issues EERS stringency important in determining ESC value and marketability What savings are required vs. business-as-usual? How is business-as-usual baseline developed? Which measures or projects qualify for credit? E.g., cases of alternative supply options crowding out energy efficiency to meet state RES How are savings estimated? Rigor of evaluation, measurement, & verification (EM&V)