California Gives OK to Using Ratepayer Energy Efficiency Funds to Encourage Gas to Electricity Fuel Substitution
by Matthew Rose, Enerdynamics Facilitator and Director at EMI Consulting
Many states are beginning to count on electrification as a key strategy for reducing carbon emissions. This includes conversion of building loads and industrial processes from natural gas to electricity. But this raises an interesting question – utility regulators have traditionally been reluctant to allow utilities to use energy efficiency dollars for programs that result in another utility (for instance the gas utility) losing loads.
Now states must grapple with the question of whether it is acceptable to use ratepayer incentives to encourage customers to switch from one fuel to another. In general, the answer has been no, but a recent decision in California suggests that in certain situations the answer may be yes. This is a big deal, because California has approximately $1 billion annually in ratepayer-funded energy efficiency (EE) programs.
The California Public Utility Commission (CPUC) agreed to update the current requirements for energy efficiency programs, specific to fuel substitution. The CPUC has required a three-prong test for energy efficiency programs that promote “fuel switching.” For example, if a California utility wants to provide rebates to customers who replace old gas water heaters with energy-efficient electric heat pumps, it must demonstrate to the CPUC that its program will:
1. reduce energy use;
2. benefit the environment; and
3. be cost-effective.
Prior to the recent decision, the difficulty in passing all three prongs had effectively eliminated the ability for utilities to get approval to use energy efficiency funding for fuel switching.
The CPUC’s decision to modify the three-prong test seemingly reflects the need to clarify test requirements and determine the conditions and market applications under which beneficial fuel-switching programs could access energy-efficiency funding, allowing utilities to offer rebates to qualifying customers. The move is ultimately designed to support the ability for utilities to:
- promote fuel-switching programs,
- with a direct link to addressing California’s climate goals,
- facilitated by transitioning away from natural gas appliances to electric offerings,
- thus reducing carbon emissions.
The decision by the CPUC to consider the test requirements for fuel substitution provides a path for utility offerings to promote super-efficient electric heating (space, water) technologies over competing natural gas technologies. The current proposal identifies specific situations in which the modified three-prong rule would apply and open the door for beneficial electrification. There are a number of stakeholders advocating for the changes including some of the state’s electric utilities, Office of Ratepayer Advocate, and many national organizations (including Sierra Club and the National Resources Defense Council). Southern California Gas publicly opposed the measure.
Key elements of the proposed decision are as follows:
- It defines the relevant “baseline” against which the proposed fuel substitution measures will calculate energy and emissions savings.
- It determines the measurement of the resulting environmental impact based on carbon dioxide emissions.
- It addresses the need to determine the relevant fuel source impacted (reflecting the growing contribution of renewable energy generation).
- It positions the cost-effectiveness requirement at the portfolio level, and it is not required for new construction applications (or codes and standards). The scope of applying the new fuel substitution test would address utility energy efficiency and renovation applications.
The current ruling does not include other fossil fuels such as oil or propane as a baseline. This will impact some of the more rural areas in the state where natural gas access may be limited.
While the CPUC agreed to approve the new fuel substitution test, Commission staff still needs to issue technical guidelines to address some of the required details around source energy savings and accounting of reductions. The CPUC also has an ongoing proceeding directed at decarbonization in buildings, which will likely have some impact on the modified cost-effectiveness modifications.
As things unfold in California, it will be interesting to see whether other states choose to follow a similar path.