Energy Efficiency Portfolio Standard

Summary

Note: In May 2014 SB 310 made significant changes to the Energy Efficiency Requirements in Ohio by essentially freezing the energy savings requirements for 2 years, allowing large customers an option of opting out of the energy efficiency requirements, and expanding the types of activities eligible to be counted as energy savings. SB 310 also created an "Energy Mandates Study Committee" to recommend further changes to the Portfolio Standard. The Committee's final report, released in September 2015, recommended the Legislature to extend the freeze indefinitely. As of October 2016, the Legislature has not extended the freeze.    

Origin

In May 2008, Ohio enacted broad electric industry restructuring legislation (SB 221) containing energy efficiency requirements for investor-owned utilities and also established the Ohio Alternative Energy Portfolio Standard (AEPS).

Initially, electric utilities were required to implement energy efficiency and peak demand reduction programs that result in a cumulative electricity savings of 22% by the end of 2025, with specific annual benchmarks. In addition, utilities were required to reduce peak demand by 1% in 2009, and 0.75% annually through 2018.
 

Electric Energy and Demand ReductionSavings

In 2014 SB 310 significantly changed the original cumulative electric energy and peak demand savings requirements. Instead of meeting the savings requirement in 2015 and 2016, utilities will determine their obligation to reduce energy and peak demand using two statutorily-defined formulas. The two formulas have the cumulative effect of reducing the amount of new required energy savings and peak demand reduction to zero during 2015 and 2016.

SB 310 freezes energy savings requirements and means that utilities do not need to exceed 4.2% cumulative savings until 2017. If this formula is zero or less for a utility, then the utility will not be required to achieve additional savings based upon the SB 221 schedule. From 2017 to 2020 utilities must achieve an energy efficiency reduction of 1% and after 2021 utilities must achieve a 2% annual reduction. By 2027 the cumulative electric savings must still equal 22%. In addition, SB 310 significantly changed annual Peak Demand Reduction (PDR) requirements, in effect (and by design) freezing them in place at 4.75% for calendar years 2015 and 2016. By 2020, the standard will once again require 7.75% PDR (as was previously required) for compliance.

The formula for determining 2015 and 2016 energy savings and PDR compliance can thus be stated as:

For Energy Savings

Achieved cumulative reduction in energy savings percentage since 2009 - (4.2 x SB 221 annual electric sales reduction)

For Peak Demand Reduction (PDR)

Achieved Annual Peak Demand Reduction (PDR) since 2009 - (4.75 x orignial annual PDR reduction in SB 221 for current year)

In order to meet the targets, utilities may implement demand-response or customer-sited programs, or transmission and distribution infrastructure improvements. In 2012, the legislature passed a bill that allows certain combined heat and power and waste energy recovery systems to qualify for the Energy Efficiency Portfolio Standard. Systems only qualify if they are installed or retrofitted on or after September 9, 2012. Certain waste energy recovery systems installed in 2002-2004 may also qualify. A system may qualify for either the Renewable Energy Resource portion of the AEPS or the Energy Efficiency Portfolio Standard. Savings from combined heat and power or waste energy recovery must be calculated by the Public Utilities Commission of Ohio (PUCO). The amount of savings claimed from these two resources cannot exceed the annual percentage of the utility's industrial-customer load.

The baseline for sales reductions are calculated based on the average number of total kilowatt-hours sold during the previous three years. For peak demand reductions, the baseline is calculated by the average peak demand during the previous three years. PUCO may alter the baseline to account for new economic growth in a utility's territory or weather changes. 

Program Administrator Type

Ohio’s electric utilities administer the programs necessary to ensure compliance with the standard.

Cost-Effectiveness and Program Evaluation

To evaluate the cost effectiveness of its utilities' efficiency and demand reduction activities, Ohio utilizes the Total Resource Cost test (TRC) (one of the five "California tests" from the California Standard Practice Manual) as its primary test for measuring the cost-effectiveness of energy efficiency programs. No additional tests are specified by law or regulation. However, several utilities are also permitted to use the Utility Cost Test (UCT) to determine the shared savings incentives they receive.

Utility Cost Recovery Provisions

Ohio allows its utilities (which have a monopoly over distribution and delivery of electricity) to decouple their distribution and delivery revenues from their sales, and also permits their utilities , to earn performance incentives from the results of successful programs based on the utilities’ achievement of specific energy savings and PDR goals.

Currently, Duke Energy Ohio and AEP Ohio operate under pilot revenue decoupling mechanisms. AEP Ohio’s decoupling rider is known as a “Pilot Throughput Balancing Adjustment”.

The distribution utilities owned by FirstEnergy (Ohio Edison, Toledo Edison and the Electric Illuminating Company), as well as Dayton Power & Light (DP&L), are not decoupled.

Energy Savings and PDR Performance Incentives: “Save-A-Watt” and Shared Savings

Duke Energy Ohio has a shareholder incentive mechanism in place known as “Save-A-Watt” (SAW). SAW is a variant on the “shared savings” approach in which the utility can make an additional incentive return on their program costs in addition to the recovery of a portion of the “shared savings” from the energy saving and PDR programs themselves.

Through the SAW mechanism, Duke Energy Ohio is able to recover 1) 50% of the avoided costs of capacity and energy associated with their programs to produce energy savings and 2) 75% of the avoided costs of capacity associated with PDR pursuant to the standard, and 3) an after-tax return on their program costs tied to achieving more than the minimum amounts required. In addition, Duke Energy Ohio is permitted to earn an after-tax “rate of return” on the direct costs of their energy savings and PDR programs in exchange for exceeding the minimum levels required by the standard. The tables below illustrate the percentages associated with Duke Energy Ohio’s compensation under the SAW approach.

On the other hand, Ohio’s other regulated public utilities (the FirstEnergy companies, DP&L and AEP Ohio) are allowed to collect tiered “shared savings” incentives based on their achievement of goals, subject to a $10 million, $13.5 million and $20 million annual cap, respectively. Below is a table describing the similar shared savings mechanisms used by FirstEnergy and AEP Ohio, which the Public Utility Commission of Ohio have merged together over time.

Special Provisions (Including Those Added by SB 310)

Opt-Out Eligibility and Recalculation of Industrial Baseline

Beginning in 2015, customers that purchase certain higher-than-standard voltage power and large commercial and industrial customers that annually purchase more than 45 million kilowatts will be able to temporarily opt-out of energy efficiency and peak demand reduction programs. These same customers have the option to permanently opt out of these programs in 2017. If a customer opts out, then they are no longer eligible to benefit from energy efficiency and peak demand programs. Additionally, large customers that opt out will no longer be considered a part of the baseline when utilities calculated annual PDR and electric sales reductions. Customers that opt-out must provide confidential reports on steps taken to reduce the energy intensity of their operations to the Public Utilities Commission. These changes are permanent in nature and do not expire with the expiration of the requirements “freeze” outlined above.

Technologies & Activities Eligible for Compliance

SB 310 provides that when new construction replaces an older facility, “the difference in energy consumed, energy intensity, and peak demand between the new and replaced facility shall be counted toward meeting the energy efficiency and peak demand reduction requirements.” SB 310 also allows investment in transmission and distribution infrastructure that demonstrably reduces line losses to be counted as electric savings and PDR.

Penalties for Noncompliance

Failure to comply with energy efficiency or peak demand reduction requirements will result in PUCO assessing a forfeiture upon the utility, which will be credited to the Advanced Energy Fund. The amount of the forfeiture is either 1)An amount, per day per under-compliance or non-compliance, not greater than $10,000 per violation, or 2) An amount equal to the then existing market value of one renewable energy credit per megawatt hour of under-compliance or noncompliance.