This is a guest post by Kevin Wilhelm, the president of Innovative Strategies, a consulting firm that makes the business case for sustainability.
Many of us are familiar with utilities’ conservation programs—you know, the ones that offer a rebate to customers who buy a super-efficient washing machine or refrigerator. Right now, there’s a big political debate in Washington state, and even a ballot measure coming this fall, about whether the state should require utilities to make even greater investments in energy efficiency.
This has, somewhat understandably, caused some waves within the business community. The fear among many businesses is that a state mandate for utilities to increase energy efficiency programs could increase energy costs in the short-term. And that, in turn, could put the state’s businesses at a competitive disadvantage.
I believe that this fear—while understandable—is actually misguided.
First of all, energy efficiency is the absolute cheapest source of new power. The best available analysis finds that conservation costs about 2.4 cents per kilowatt-hour, which is a full cent cheaper than the next closest source—natural gas.
In other words, paying for efficiency saves about 30 percent, compared with paying for new power plants. So if you are pro-business, and care about power prices, then you should be for energy efficiency.
Second, WA State’s competitive advantage over the last 40 years afforded to it by low-cost energy is eroding. And conservation offers our best shot at keeping that advantage from eroding even further.
Since 1999 average energy rates have increased 50% for industrial and 30% for commercial businesses (see, e.g., this big pdf.) As a result, our energy is still cheaper than the national average—but far, far more expensive than it used to be, even just a few years ago. Take a look at the change in our rankings for electricity costs for business, just from 1999 through 2003:
WASHINGTON STATE ENERGY COSTS – RANKING AMONG U.S. STATES
YEAR Commercial Industrial
Electricity Electricity
1999 49th 50th
2003 38th 32nd
(Source: CTED 2005 Biennial Energy Report, (pdf warning), section 4 page 9).
With regional energy demand expected to increase by 25% or roughly 5,000 megawatts by 2025 (the equivalent to 5 million new homes), where is this power going to come from? What is this going to do to prices and how is this going to impact business? Will our competitive advantage on power prices erode even further?
Fortunately, energy efficiency is a huge step in the right direction. Close to 50% of estimated demand growth by 2025 can be met through investments in energy efficiency. (NPCC 5th Power and Conservation Plan).
Moreover, the State has a positive track record in this regard already, as it met over 25% of its annual energy demand increase through energy efficiency conservation measures during the 1990s.
Investment in energy efficiency is not only about obtaining the cheapest source of new power for businesses, but it is a proactive way to maintain the State’s competitiveness through clean, secure, domestic sources of energy which already exist and don’t involve the construction of any new power plants. In short, ramping up efficiency is, from a business viewpoint, the smartest move the state can make.
And in this case, what’s good for business also happens to be good for the climate.
Patrick B. McGrath
The indefatigable Amory Lovins, along with Paul Hawken, has a great book out that explores this idea: _Natural Capitalism_. If you haven’t read it yet, go out and get it now. It’ll fill you with a sense of well-grounded optimism.
Alan Durning
Well put, Kevin.I think the next question is why state requirements for utilities to invest in efficiency are warranted, given that it’s such a good buy on its own merits.The case for mandating all cost-effective efficiency investments is strong, in my view, because utilities’ incentives are not naturally aligned with their customers’. Customers want to save money. And society wants them too. It’s in the public interest.But utilities’ interest is to sell as much power as they can generate or buy for less than the market-clearing price. Generating or buying additional power is often expensive, which creates an incentive for utilities to foster efficiency—to avoid those expenses. But very utilities have the incentive to help their customers save as much electricity as is economically efficient.Several policy responses help: efficiency standards, mandatory investment in cost-effective efficiency, and—my favorite—decoupling utility sales from their profits.
Sebastian Helm
I can see how standards anddecoupling can be made pro-business, but I don’t see the case for mandatory investment. If each dollar invested in lighting saves nine dollars in electricity then Smith’s invisible hand should do the job perfectly. What am I missing?
Alan Durning
Sebastian,Good question. Crude answer: Utilities themselves don’t save the nine dollars in electricity—they lose the revenue.There’s an argument to be had over whether decoupling and mandating investment are redundant. In theory they would be. In practice, I’m not so sure. But I’m sure it’s worth arguing about.