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Home > Feature Articles > Alternative Energy Solutions

Energy Conservation Is STILL the Solution - ESC Tools Help

ESCs are a subset of market-based policy instruments that are favored for their economic efficiency and competition benefits

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california incentives green solutions The Intergovernmental Panel on Climate Change (IPCC), an international body headed by the United Nation Environment Programme and the World Meteorological Organization, issued its assessment confirming the scientific basis for the reality of global climate change. Among its most important findings, the IPCC assessment noted that the negative impacts of the current rate of global warming will intensify and accelerate throughout this century, and that it is critical that actions now be undertaken to mitigate climate change’s negative consequences to ecosystems, habitat and population.10 James Hansen, Director of NASA’s Goddard Institute on Space Studies and one of the foremost experts on climate change, is more direct, saying man has just 10 years to reduce greenhouse gases (GHG) before global warming reaches what he calls a tipping point and becomes unstoppable.

The Stern report, released on October 30, 2006 by the government of the United Kingdom (UK), states that if climate change is allowed to continue unmitigated, the related costs could devour as much as 20 percent of the world’s gross domestic product. Success in slowing carbon emissions could bring great savings to the world economy, possibly in the range of $2.5 trillion a year.

Corporate and citizen awareness of climate change in the United States has reached an all time high. In the absence of clear federal policies, local and state governments and Fortune 500 corporations now lead in promoting energy efficiency, greater use of clean and renewable energy sources and other GHG emissions reduction strategies. An increasing number of businesses and institutions are voluntarily reducing or offsetting their GHG emissions footprint and a dozen or more states are considering market-based “cap-and-trade” programs13 as a means to implement GHG emissions reductions.

In general, GHG cap and trade programs by themselves do not achieve either greater savings from energy efficiency or increased generation for renewable energy sources. This is, in part, the result of a flawed design of such programs: emissions targets and allowances are aimed predominantly at large emitters, and, as a result, renewable energy projects, for example, do not qualify for allowances or contribute to reducing the overall emissions cap.

Reductions in energy consumption and emissions achieved by energy efficiency should be considered an important element of energy management and resource planning. Effective energy efficiency programs can meet a wide variety of policy goals including increasing energy system reliability, reducing energy use and lowering consumers’ electric bills, and lessening negative impacts on the environment. In the United States, energy efficiency has traditionally been a mandate that states place upon utilities and that are paid for by ratepayers and consumers.

Although energy efficiency has been promoted by energy regulators and policy decision-makers for some time, it has yet to fully meet its promise and achieve the expected level of energy reductions. There are several reasons for this.

  • First, there is the widely held view that energy efficiency measures are unreliable, unpredictable, and unenforceable, and, therefore, energy efficiency cannot be relied upon as a utility system resource.
  • A second reason is that investing in energy savings is often seen as less attractive than investing in supply-side technologies. In part, this is due to the fact that energy efficiency measures often focus on facilities and systems already in place and do not involve major new construction or installation projects.
  • Further, because energy savings opportunities are so diverse and often found in small increments, there has not been an efficient mechanism for aggregating the savings.
  • A financial tool to support the widespread selling and trading of energy savings in the marketplace is not yet available.
In the past few years, however, important changes have taken place that signal opportunities for more widespread commitment to energy efficiency strategies:
  1. The creation and rapid growthof the renewable energy certificates (RECs) market in North America quantifying the benefits associated with renewable energy;18
  2. the creation and implementation of tracking systems to issue and track RECs;19
  3. improved methods for measuring and verifying energy savings;
  4. the development in Europe of the concept and a market for “white certificates” or energy savings certificates (see below); and
  5. the increased awareness in the United States of the threat of climate change, and the growing interest on the part of local and state governments, businesses, institutions and private citizens in taking early actions to reduce GHG emissions, including individual GHG footprints.
An Energy Savings Certificate (ESC) is an instrument issued by an authorized body guaranteeing that a specified amount of energy savings has been achieved. Each certificate is a unique and traceable commodity carrying a property right over a certain amount of additional energy savings and guaranteeing that the benefit of these savings has not been accounted for elsewhere.

Countries implementing, or considering the implementation of ESCs, are in fact aiming to meet the requirements of the Kyoto Protocol, 22 and many scientists and policymakers think that the best short-term strategy for making significant and rapid GHG reductions is to launch a massive program in support of energy efficiency. One approach is to institute strong energy efficiency measurement and verification methodologies along with a credible tracking system that guards against double counting and identifies measures that meet additionality criteria.

ESCs may be a necessary tool in order to make this link.

Generally, energy savings are obtained from consumers’ dwellings or facilities. Suppliers typically use three approaches to generate ESCs:

  1. fund energy savings programs directed at their customers,
  2. contract with appliance retailers who increase their sales of energy efficiency goods in exchange for funding from the energy supplier, and/or
  3. use programs conducted by energy service companies (ESCOs).

We have found that a significant barrier to the use of ESCs is the problem of transaction costs. For example, instituting a rigorous system of energy savings measurement, evaluation and verification introduces additional costs on the system’s participants. However, these costs are necessary, since the greater certainty of the energy savings results provided by ESCs increases a program’s credibility and trust. Therefore, for financial incentive programs and for programs with targets set by regulation with financial penalties for non-compliance, the benefits from ESCs can exceed any incremental transaction costs. Moreover, any incremental costs will be further offset by the added market flexibility afforded by ESCs and by providing a market instrument that guards against double counting/selling of the energy savings.

A potentially significant negative aspect to ESCs is that they make energy savings a marketable commodity, rather than a public service or public good. As a commodity, the dictates of the market will tend to direct investment towards energy savings measures with the lowest cost, thereby deterring investments in projects that may have greater up-front costs, or longer payback periods, but would achieve potentially greater or broader energy savings. These issues can be addressed through the careful design of an ESC program.

To sum up, ESCs are a subset of market-based policy instruments that are favored for their economic efficiency and competition benefits, for improving credibility of energy savings measurement and verification, for providing positive incentives for cost reduction, and for continuous improvement and ability to minimize costs of compliance with policy targets—the market is left free to identify the least-cost options.

Energy savings targets can be included as part of a GHG cap and trade program or as a supplement to such a program.

Center for Resoruce Solutions
Dr. Jan Hamrin, Dr. Edward Vine and Amber Sharick, May 21, 2007

Henry P. Kendall Foundation

Link to the "The Potential for Energy Savings Certificates (ESC) as a Major Greenhouse Gas Reduction tool"

Edited by Carolyn Allen, owner/editor of California Green Solutions
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