New laws in Illinois, Michigan seek to tap power of energy efficiency
When it came to helping craft a complex, landmark package of bills to revamp the state’s energy policy and map out the future of electric power in Michigan, Sen. Mike Nofs tried to at least keep one part of the legislative work simple and unchanging — the measure’s overarching goals.
“We wanted to control our destiny, regardless of the policies being set at the federal level,” he says. “And that meant focusing on affordability, reliability and clean energy.”
And that, in turn, led him and other lawmakers to make efficiency — or “waste reduction,” as it is now referred to in Michigan statute — a big part of the state’s new energy law, which was signed by Gov. Rick Snyder in late 2016 (SB 437 and SB 438).
Only weeks before, another Midwestern state, Illinois, also took sweeping actions on energy policy, with a law that includes new incentives and standards for its utilities to achieve greater efficiency.
The two states have different electricity markets and challenges, but they share a common interest in pursuing what can be the cheapest energy of all — that which doesn’t have to be produced.
“If you don’t have to build a new power plant to replace an old one, that’s real savings for customers, and that’s the value of energy efficiency,” Nofs says.
Setting up utilities ‘for success’
More than many states, he adds, Michigan has an imperative to use energy efficiently, because it is a “peninsula state” that has limited transmission lines and that must provide much of its own electricity. And in the many months leading up to passage of the new energy plan, lawmakers saw big changes occurring not only inside Michigan’s borders, but across the Midwest’s electric grid: namely, the closures of several older, coal-powered plants.
“That was a big driver for our discussions over this energy bill,” says Sally Tallberg, chair of the Michigan Public Service Commission, adding that a mix of factors — age, environmental rules and cheap natural gas — are causing the plants to shut down. “In the past, we’ve been able to rely on a pretty hefty cushion of supply, but these closures have eaten into that margin.”
Michigan’s new plan is multifaceted, tackling tricky policies on electric choice, distributed generation and renewable energy, while also putting in new rules for all suppliers to have long-term plans (subject to review and approval by the Public Service Commission) to meet the state’s need for affordable and reliable power. But the new law doesn’t just envision a supply-side solution to Michigan’s energy challenges; it also includes new strategies for controlling demand.
For starters, the Legislature has set a new clean energy goal: by 2025, to have at least 35 percent of Michigan’s electric needs be met through a combination of energy waste reduction and renewable energy.
The state’s efficiency standards remain unchanged from the previous law — a target of 1 percent of retail sales for electric providers and 0.75 percent of retail sales for natural gas providers. The big change will instead come from a new set of financial incentives and cost-recovery mechanisms, says Nick Dreher, policy manager with the Midwest Energy Efficiency Alliance.
“The whole package sets up the utilities for success,” he believes.
For providers that meet or exceed the state’s efficiency standards, the amount of incentives available to them is greater than under the previous law.
These incentives come in the form of “shared savings” from a successful efficiency program: ratepayers save with lower electric bills, but part of that cost reduction then goes to financially reward the utility. In Michigan, too, the better the performance by the utility (in terms of its energy savings), the greater the level of the incentive.
Another important provision, Dreher says, removes a statutory limit on how much Michigan’s utilities can spend on efficiency. The ceiling had been 2 percent of revenues; under the new law, there is no cap at all.
To encourage customers themselves to invest in projects that make their houses more energy-efficient, the state will allow utilities to provide for “on-bill financing,” which gives homeowners the chance to finance and pay off project costs over time on their utility bills.
According to Nofs, Michigan’s new law reflects both the proven success of energy efficiency and the potential that legislators see for future savings. In a study examining the impact of the state’s efficiency standard, the Michigan Public Service Commission found that for every $1 spent on an efficiency program in 2014, the benefit to customers was $4.38.
In the future, with utilities’ rollout of smart meters and customers’ increased use of new appliances and personal devices such as smart phones, ratepayers will have the chance “to control their thermostats, washers and dryers when energy is the cheapest through voluntary demand programs,” Nofs says.
“Dynamic pricing” is one of many strategies that electric providers can pursue to promote efficiency.
“Generally they’re going to look at programs that have worked well in other states,” says Stacey Paradis, executive director of the Midwest Energy Efficiency Alliance. “They’ll look to expand their portfolio of options for different rate classes. They’ll focus on greater participation. And as part of that, they’re going to try and increase their marketing and outreach.”
Illinois’ new efficiency incentives
Illinois’ energy law (SB 2814), signed by Gov. Bruce Rauner in December, saved two of the state’s nuclear power plants from closing, but it also was lauded by supporters of energy conservation. Nick Magrisso of the Natural Resources Defense Council says Illinois now has “one of the top energy efficiency programs in the nation.”
Included in SB 2814 are new targets for the state’s two principal utilities; by 2030, ComEd and Ameren are required to reduce energy use by 21.5 percent and 16 percent, respectively.
Another statutory change will allow utilities to count more than just “the first year of energy savings from a particular efficiency measure,” notes Julia Friedman, senior policy manager for Midwest Energy Efficiency Alliance. “[They] get to count the lifetime of savings from that measure,” she says. “It allows for a better assessment of measures that have a longer lifetime.”
For the first time, too, Illinois has financial incentives in place to reward the utilities for exceeding the state’s efficiency standards (under the new law, those targets gradually increase between now and 2030).
According to Paradis, the experience of other states in the Midwest show that these types of incentives, which allow utilities to generate revenue by conserving rather than simply producing power, can work.
“States like Iowa and Minnesota have made substantial investments in energy efficiency over 25 and 30 years,” she says, “and they continue to see the benefits.”
In Illinois, lawmakers also revisited the cap it had in place on how much utilities could spend on efficiency. While the cap was not eliminated (which did occur in Michigan), it was raised from 2 percent to 4 percent.
In addition, more targeted investments will be made to help low-income households conserve and save. For example, Illinois’ utilities must form advisory committees to help them design low-income energy efficiency programs, and ComEd must spend a minimum of $25 million per year on these initiatives.
Midwest’s changing energy mix: States’ net generation for electric power, 2005 vs. 2015