Executive Summary

A. The purpose of a national energy policy should be to satisfy growing demands for energy services at the least cost to the nation, with the minimum levels of environmental damage and overall societal risk. Energy efficiency will be a crucial part of such a strategy.

B. Energy efficiency can help solve short-term problems with electricity reliability and cost and with high natural gas prices

H.R. 778 - tax incentives for energy efficient buildings and equipment could induce short-lead-time improvements in efficiency of air conditioners (almost 30% of peak power) and commercial lighting systems (about 15% of peak).

C. Other policy opportunities:

1. Accelerate adoption of energy efficiency standards for appliances and equipment.
   
   
   a. Oppose rollback of air conditioner efficiency standards.
   
   b. Increase budget for DOE to get back on statutory schedule for adopting appliance efficiency standards.
   
   c. Establish standards for new products, legislatively and by delegation to DOE.
   
   
   
2. Upgrade energy efficiency standards for buildings.
   
   
3. Adopt a 40 mpg fuel economy standard for automobiles.
   
   
4. Adopt H.R. 1316 - provides tax incentives for super-efficient refrigerators and clothes washers.
   
   
5. Adopt H.R.1864 - tax incentives for energy efficiency technologies in automobiles. .
   
   
6. Enact a matching public benefit trust fund for state expenditures on energy efficiency..
   
   
7. Expand Energy Star program.
   
   
8. Expand funding of energy efficiency research and development.

1. Policy Framework

Good strategic planning -- whether for the national government or for a private business -- requires that one first set a clear mission statement and overarching goals, and then develop objectives and policies that can implement the goals. One of the factors preventing a thoughtful debate on the subject of energy strategy is that we've jumped to the detailed steps before first discussing goals.

What is the goal of a national energy policy? Much of the current energy debate seems to be based on the overarching but unstated premise that it is the goal of national policy to balance energy supplies with projected energy demands. This was the view of many in the 1970's, as well.

The problem with this approach is that it requires top-down, central planning that stifles innovation: government is assumed to be responsible for assuring adequate supplies and, if necessary, doing something about demand. Since the 70's we have altered American energy policy to rely more and more on markets. Building supply to match demand is no longer a federal government function, if it ever was.

So what should be the purpose of national energy policy? NRDC submits that the purpose of a national energy policy should be to develop mechanisms and market incentives that satisfy growing demands for energy services and environmental protection at the least cost to the nation. Energy services are those valuable things that energy is used to produce, such as comfortable buildings, ways of getting to and from places we want to go, providing lighting systems and computers, and, in businesses, producing products that we can sell.

Fundamentally, most people don't care much about global issues of energy supply and demand. But they do care a lot about reliable electric service and what they pay for utility bills and for gasoline. And they also care about clean air and water, preserving wild environments from industrialization, and protecting the planet from the effects of accelerating global warming.

Energy services can be produced at a variety of different levels of efficiency, and with a variety of choices of fuel. Some of the choices are more environmentally damaging than others. As a matter of policy, we should pick the cleaner choices. Some of these choices are more expensive than others. As a matter of policy, we should get the cheaper ones first. Some of the choices are riskier than others. As a matter of national policy, we should balance risks and construct a portfolio of choices that minimizes risk.

If we accept the goal of societal cost minimization -- which is strikingly similar to the goals Congress chose when it established DOE^[1] -- then the next step should be to produce an actual least-cost energy plan. This sounds like a daunting activity, but in fact has been undertaken successfully, at least for the electricity sector, for over 15 years. The Northwest Power Planning Council, beginning in the mid-1980's, developed a Northwest Power Plan which compared a range of choices on energy efficiency with all of the available options that could be identified on the supply side and ranked them in least-cost order. In calculating costs, risk and environmental cleanliness were taken into account. This was less difficult than might be imagined, because in general the cheaper options also turned out to be cleaner and lower risk. And all this was done in an open public process.

The results were good, in two respects. First, the Plan lessened the degree of political controversy over energy and replaced it with wide, if not total, consensus. Second, the region avoided some really bad investments and moved into a position of leadership on energy efficiency.

From analyses that have already been done at the state and regional level, as well as at the federal level, it is already clear that energy efficiency will be the cornerstone of a national least-cost energy strategy.

Once the measures that we are trying to implement have been identified, the next step is to look at markets and determine whether policy interventions are feasible and what sorts of policy actions would be most effective in achieving the objectives identified in the least-cost plan.

Looking at markets is critical because energy and most energy services are produced in markets. Many of these markets are global, and simple-minded interventions in such markets don't always have the desired effect.

Analysis of markets and policies for promoting least-cost energy investments demonstrates that there are four generic types of federal and state policies that are the most effective and the most economical at achieving their objectives. They are:

• Efficiency standards for major users of energy, such as buildings, appliances, equipment, and automobiles.
  
  
• Targeted incentives for more efficient technologies based on performance. These incentives have been administered primarily by utilities, although the state of Oregon has run a successful tax incentive program as well.
  
  
• Education and outreach on energy efficiency, although educational programs have worked best when performed in the context of financial incentive programs.
  
  
• Research on energy efficiency technologies and systems. The three policies noted above only work when there are economically attractive options available. Federally funded research has led to new opportunities for these other policies to work.

Within each of these four categories, there are significant roles that can be undertaken by the federal government.

Federal policy should begin with the principle: "first do no harm." Unfortunately, that has not been the direction of the last few months. Despite some kind words for energy efficiency in the Administration's "National Energy Policy," the actual substantive policies proposed by the Administration have pushed the country even farther off the path towards minimizing energy costs for consumers or energy-related damage to the environment. The most egregious examples so far are:

• The Department of Energy's proposal to roll back the final rule for air conditioner standards published in the Federal Register in January. NRDC, the Consumer Federation of America, and three states believe that this action is illegal on procedural grounds -- the rule being considered for weakening is a Final Rule promulgated 7 years past the statutory deadline under a law that prohibits rollbacks of Final Rules -- but it is also hard to defend on policy grounds.
  
  
• The air conditioner rollback alone -- were it to succeed -- would cause the need to construct 43 new 300 megawatt power plants by the year 2020 and would cost consumers billions of dollars. Had the Department of Energy promulgated this standard on time rather than 7 years late, the Western grid would be enjoying some 400-600 megawatts of peak power relief, half of which would have occurred last year. That alone might have been enough to prevent rolling blackouts.
  
  
• Proposed budget reductions in programs to develop and promote appliance and building energy efficiency standards. The standards efforts are among the most cost-effective investments of the federal government for any purpose. Every dollar invested in developing and enforcing energy efficiency standards for appliances has yielded $200-1,000 in private sector benefits. Yet these activities, representing a tiny fraction of the federal budget, are proposed for drastic reductions. This proposal is all the worse because it hinders DOE's ability to meet statutory deadlines for standards.
  
  
• Proposed budget reductions for energy efficiency research and development (R&D). The National Energy Plan notes the importance of new technology for improving energy efficiency. But new technology doesn't just happen. Someone needs to pay for it. And, unfortunately, market failures make it uneconomical for the private sector to do so. Government R&D on energy efficiency should be increased, not cut back.

2. Why Energy Is Important in Summer 2001

For virtually all of the last three decades, energy has been an important issue because of the impacts of energy cost on economic growth and on the environment. Even before the recent jumps in energy prices, our nation's energy bill exceeded half a trillion dollars a year^[2] -- or 6% of the gross domestic product (GDP). This is much higher than in other industrialized countries. So, in addition to harming household budgets and reducing the bottom line of energy-consuming businesses, energy is a competitive drag on the U.S. economy.

Throughout the last 30 years, energy has been a major threat to the environment, accounting for the overwhelming bulk of air pollution emissions, most U.S. greenhouse gas emissions, and significant fraction of threats to wilderness lands and recreation areas posed by energy development. Promoting energy efficiency is perhaps the only approach that can both protect the environment and promote economic development.

But in the last year, specific new challenges arose that are impacting businesses and consumers: electrical reliability and high costs of gas and heating oil.

Let's start with the problem of electric reliability. Not only in California and the West, but in many other regions as well, we are facing the risk of electrical blackouts and/or excessively high electricity prices this summer and next. Regions confronting these problems are trying to move forward aggressively both on energy efficiency programs and on power plant construction. But the lead times for most actions on the supply side are far too long to provide a solution. And demand-side approaches attempted on a state-by-state level are much less effective than coordinated national activities.

There are few policy levers that can be pulled that will address the problem of physical shortages. But that doesn't mean that there is nothing that federal policy initiatives can do. To the contrary, targeted incentives for those end-uses focused heavily on peak power reduction can begin to make a difference as soon as next summer.

Here, H.R. 778 could be a critical piece of a national solution to electric reliability problems. Air conditioners, for example, represent about 30% of summertime peak electric loads . Air conditioners that use a third less power can be purchased today, but they are not produced in large enough quantities to make a difference to peak load. If incentives are made available, manufacturers could begin to mass-produce these products in a matter of months, not years. Mass production and increased competition for tax incentives will drive prices sharply lower, so the incentives will be self-sustaining in the long-term. And with 5 million air conditioners being sold every year, a sudden increase in energy efficiency could have a significant effect in balancing electricity supply and demand even after less than a year.

Another peak power efficiency measure with a very short lead time is the installation of energy-efficient lighting systems -- either new or retrofit -- in commercial buildings. Some 15% of electrical peak power results from lighting in commercial buildings. Efficient systems, such as those NRDC designed and installed in our own four offices, can cut peak power demand by over two-thirds while improving lighting quality. Lighting systems are designed and installed with a lead time of months, so incentives for efficient lightings as provided in H.R. 778 could begin to mitigate electric reliability problems as soon as next summer.

The second major new problem is the skyrocketing cost of natural gas, which caused heating bills throughout the country to increase last winter. Improved energy efficiency can cut gas use for the major uses -- heating and water heating -- by 30%-50%. Much of this potential could be achieved in the short term, because water heaters need replacement about every ten years, and are the second largest user of natural gas in a typical household (and largest gas user in households living in efficient homes or in warm areas). Water heaters are covered by H.R. 778.

Clothes washers also turn over about every 15 years, and efficient clothes washers save natural gas by reducing the amount of hot water needed to get clothes clean and reducing the amount of time they must spend in the dryer. H.R. 1316 can provide the incentives to get large numbers of clothes washers out into the marketplace in time to reduce pressure in natural gas prices by winter 2002-3.

These types of quick-acting incentives help consumers in two different ways: first, they provide new choices that are not currently available in practice for families and businesses that want to cut their own energy costs while obtaining tax relief. Second, they help non-participants because reduced demand cuts prices for everyone.

3. Specific Policy Recommendations

A. Energy Efficiency Standards for Appliances and Equipment

The two most effective energy policies of the past 30 years have been energy efficiency standards for appliances and equipment, and the Corporate Average Fuel Economy (CAFE) standards for automobiles. Appliance efficiency standards adopted to date will save the nation's consumers some $200 billion while reducing electricity consumption at the peak by a projected 12.6% in 2020. Even larger savings can be achieved by standards that could be adopted in the future by DOE or states. Congress has a key role to play in the adoption of these standards. Specifically, the following actions can produce immense economic as well as environmental benefits while encouraging American competitiveness and promoting new technologies:

1. Provide DOE with sufficient funding to get back on statutory schedule for all appliances. The National Appliance Energy Conservation Act (NAECA) of 1987 and its amendments of 1988, along with EPAct, established a continuing non-discretionary schedule of rulemakings on appliance and efficiency standards for DOE. Yet, DOE has fallen years behind statutory schedule on virtually all appliances. Much of this is due to an insufficient budget.
   
   Things are so stalled at DOE that it has conducted Prioritization Proceedings for the last several years to determine how to manage its failure to comply with the law. DOE looks at its existing resources and decides how many of its non-discretionary schedules it can meet, and where it could obtain the greatest bang for the buck for the schedules it does meet. This is a ridiculous way to conduct government policy. DOE should propose a budget that allows it to get back on schedule and Congress should provide sufficient funds and oversight to make sure that DOE is indeed on schedule.
   
   
2. Congress should establish legislative standards for a number of appliances and direct DOE to set standards for others. There is a long list of products, both used by business and by consumers, for which standards are not currently in effect and where immense potential for highly cost-effective savings exist. In many cases, states such as California are well on the way to adopting such standards. Congress could simply enact these same numbers legislatively, as it did in the previous three pieces of appliance efficiency legislation. For other products, additional administrative inquiry is necessary, and Congress should authorize such actions and set appropriate deadlines.
   
   
3. Congress could allow greater state discretion in setting appliance efficiency standards. States agreed to the previous pieces of appliance efficiency legislation in return for a strong national policy, in which DOE would set and update standards to the maximum level of efficiency that is technologically feasible and economically justified. This agreement is cold comfort to a state if the DOE rulemakings fall years behind schedule and show no sign, in many cases, of ever catching up. Congress could put a sunset on preemption by allowing states the freedom to set appliance efficiency standards if DOE falls more than three years behind its mandated schedule. Indeed, one of the most effective policies Congress could implement to address the California energy crisis is to allow it to enforce its own air conditioner efficiency standards by next summer.
   
   
4. Congress should extend the mandatory rulemakings in the appliance acts to require new standards to be considered every 5 or 7 or 10 years. When NAECA was first negotiated in 1986, it required DOE to consider revising standards for most products every 5 years, and for some products every 7 or 10 years ad infinitum . When the legislation was reintroduced in 1987, the number of rulemakings was limited, but there is no policy reason for this limitation. Just as labor productivity is expected to continue growing, even to grow at accelerated rates -- so should we expect the efficiency of buildings and appliances to continue to grow. DOE should continue to evaluate appliance efficiency standards on a regular schedule as long as these evaluations keep showing, as they have, the opportunity for large savings in energy and money.

B. Energy Efficiency Standards for Buildings

1. DOE should set tougher efficiency standards for federal buildings and extend these rules to the private sector. Under EPAct, states are required to adopt national model standards for energy efficiency in commercial buildings and to consider the adoption of national model standards for residential buildings. Unfortunately, the models on which this legislation is based have not been managed effectively by their non-governmental sponsors: increasingly they fail to maximize cost-effective energy efficiency. The reference ASHRAE standard for commercial buildings has been revised only once since 1989, for an additional energy savings of a paltry 5% or less. At the same time, typical buildings in California often use 30% and 40% less energy than this standard, and NRDC's own buildings have been designed to operate at enhanced comfort and productivity levels for a third or less of the energy of the national model. DOE should be required to establish model standards that save at least 30% and these should be adopted by states. Similar percentages could be mandated for residential buildings at a net savings in money to consumers.
   
   
2. Almost a third of new housing construction is manufactured houses. The efficiency of manufactured homes is regulated at the national level, and the standards have not been changed in about 10 years, despite improvements in energy efficiency technologies and reductions in their cost. Congress should require the Department of Housing and Urban Development to revise its energy efficiency standards for manufactured housing based on minimizing lifetime owning and operating costs to the consumer, including analysis of the efficiency savings from higher efficiency heating, cooling, and water heating equipment.

C. Energy Efficiency Standards for Automobiles

1. Congress should set higher fuel economy standards. America's automobile efficiency standards, which contributed to improvements in fuel economy throughout the rest of the world as well as here in the U.S., were undoubtedly a major contributor to the low energy prices that prevailed in the decade and a half following their implementation. And the current stagnation in fuel economy standards, which have remained essentially unchanged since 1985, undoubtedly is a cause of OPEC's pricing power in today's market.
   
   Congress should raise fuel economy standards for automobiles. Studies have shown that raising the CAFE standard to 40 mpg for cars and light trucks is feasible. Even though there is a significant lead time for manufacturers to design and mass produce new technologies for fuel efficiency, the lead time is still faster than that for developing new oil resources. Ultimately, if we are concerned about oil imports, the only solution is to use less domestically: supply options are grossly insufficient ever to allow a reduction in imports without aggressive demand side action.
   
   
2. Congress should set standards for replacement tires. It is a little known fact that auto manufacturers use highly-efficient tires to comply with current CAFE requirements, but comparable tires are not available to the consumers as replacements. Congress should require replacement tires to meet the same specifications as those sold on new cars. This measure alone would save over 70% more oil than is likely to be found if drilling were permitted in the Arctic National Wildlife Refuge.

D. Targeted Incentives for Energy Efficiency

Economic incentives have proven to be an effective policy for providing advances in energy efficiency technology and for making markets begin to work at supplying energy efficiency. Most of the effective incentives have been applied through the utility system; numerous third-party studies of these programs have shown that they typically have benefit/cost ratios of 2-1 or better.

Incentives have been even more effective at bringing major technological advances into the marketplace and getting them widely accepted. This is called market transformation. Market transformation incentive programs tend to require longer lead-times and more consistent availability of funding. This is what manufacturers have asked for, and this is what has worked in the modest number of examples where programs have been implemented. The scope of such programs can be vastly expanded by adding programs that operate through the tax system.

Specific policies that can accomplish this purpose are:

1. Congress should pass tax incentives for energy efficiency. Because tax incentives are in effect for a long time, it is important that they be designed carefully and to maximize competition on a level-playing field. NRDC urges your support for specific proposals that have been well-vetted and meet these criteria. These are all bipartisan proposals. They are:
   
   
   a. Enact Cunningham/Markey Bill, H.R. 778. This bill provides tax incentives for energy efficiency in buildings. Buildings account for over a third of energy use and air pollution, and almost half of total energy costs. This bill provides performance-based and fuel neutral incentives for large savings in energy -- typically 30%-50% -- and then phases out after 6 years. It is one of the very few opportunities that the federal government has to improve the peak power situation in the West, and in other regions facing this problem, as soon as 2002.
   
   b. Enact Nussle/Tanner Bill, H.R. 1316. This bill provides tax incentives for super efficient clothes washers and refrigerators, and was developed through a consensus process between states, utilities, energy efficiency advocates, and the appliance industry.
   
   c. Enact Camp Bill H.R. 1864. This bill was developed collaboratively between many of the nation's automobile manufacturers and public interest organizations. It provides tax incentives for a variety of advanced technologies and alternative fuel vehicles, including hybrids and those that run on fuel cells.
   
   d. Provide tax incentives for energy efficiency improvements in existing homes. In the few cases where trained energy inspectors can look at energy performance of homes, they will typically find the opportunity to save 30% or even 50% of energy cost with an investment so low that the interest payments on a loan to finance energy efficiency are smaller than the monthly utility bill savings. Yet market barriers prevent these retrofits from taking place in most cases. NRDC has suggested a modest and medium-term tax incentive for home retrofits that are certified by independent third parties to save energy and money.
   
   
   
2. Enact a matching public benefit trust fund that matches state public benefit trust expenditures on energy efficiency. This is similar to what was proposed in last year's S. 1369. Public benefit trust expenditures help businesses, both large and small, as well as consumers, improve energy efficiency. They can be managed by their implementers for maximum effectiveness. This is a program that has worked in the states where it has been tried, and should be expanded to take advantage of a greater fraction of the available opportunities.
   
   
3. Education, outreach, and information provisions have been other ways to promote energy efficiency. These methods work best when they are conducted in parallel with economic incentive programs. Thus, utilities that have developed energy information centers have found them to have a measurable favorable impact on the market in areas where the utilities were also offering economic incentives for efficiency. The federal ENERGY STAR labeling and information program has been effective at establishing brand awareness for energy efficiency nationwide and even more effective in areas where it is complemented by utility-based incentives. Congress should provide increased funding for the ENERGY STAR program. Parallel promotional efforts are likely to be handled by funding made available through the public benefits trust.

E. Research and Development

As noted by D. Allen Bromley, former President Bush's Science Advisor from 1989-1993, "the major driver of our nation's economic success is scientific innovation...the proposed [Administration's] cuts to scientific research are self-defeating policy. Congress must increase the federal investment in science. No science, no surplus. It's that simple."

This observation applies even more strongly to energy efficiency, where we already know that many types of innovation appear feasible with additional research and that market barriers make it foolish for private sector companies to invest in this R&D.

The chilling effect of market failures on energy efficiency R&D is easy to understand. In today's market, most consumers will overlook investments in energy efficiency that payback their additional costs in as little as 2-3 years. Manufacturers know this and generally do not offer efficiency options at all, or else only offer those that payback exceedingly quickly. Thus, if there is a potential new technology that could reduce energy cost dramatically, but would payback in 3 years, manufacturers have no incentive at all to perform the research and development. A smart manufacturer quickly recognizes that even if the R&D is fully successful, and the product performs equally well and saves energy with a 3-year payback, it won't sell.

In order to meet the critical environmental goals of improving air quality and mitigating global warming, our nation must invest more money, not less, in federal research and development in energy efficiency and renewable energy sources. These options offer the best possibilities to meet environmental goals while promoting economic development and reducing energy cost, rather than raising costs and hurting the economy.

NRDC believes that compliance with the Kyoto Protocol goals would actually enhance economic development, and that compliance can be achieved largely through the types of policies discussed above. Energy efficiency policy offers a golden opportunity for the United States to promote national and global economic development while meeting our environmental goals: particularly the goal of protecting the global climate. Our research, and that of our colleague organizations in the public interest sector, shows that the United States can achieve compliance with the Kyoto Protocol through purely domestic policy actions at a net gain to the economy, not a cost. This solution comes about through the implementation of already existing technologies for improving energy efficiency and harnessing renewable energy resources.

Enhanced research and development would allow newer technologies to further reduce compliance costs and expand environmental benefits. Rather than cutting budgets for energy efficiency R&D, Congress should increase them.

F. A National Least-Cost Energy Plan

This testimony began with a discussion of the role that a National Energy Plan striving for achieving energy service needs at the least cost could play in simultaneously promoting environmental protection and economic development. Such a least-cost approach is fully consistent with the legislative instructions DOE was given when Congress established it. It is also a requirement of EPAct.

Despite the manifest reasons for developing a least-cost approach to national energy planning, the Department of Energy, under both Democratic and Republican Administrations, has failed to take a least-cost approach. Congress should explicitly require that subsequent national energy plans be based on an approach of minimizing the cost of providing energy services for an expanding economy. The Department has, through its national labs and other resources, the ability to do this work. A national least-cost plan will be the first step towards generating bipartisan and multi-interest-group consensus on national energy policy.

Notes

1. The Department of Energy was established by Congress, (42 USC § 7112) among other things, to:

• "Promote maximum energy conservation measures…
  
  
• Provide for a mechanism through which a coordinated national energy policy can be formulated and implemented to deal with the short-, mid- and long-term energy problems of the nation; and to develop plans and programs for dealing with domestic energy production and import [sic] shortages.
  
  
• Create and implement a comprehensive energy conservation strategy that will receive the highest priority in the national energy program.
• Place major emphasis on the development and commercial use of solar, geothermal, recycling and other technologies utilizing renewable energy resources.
  
  
• Promote the interests of consumers through the provision of an adequate and reliable supply of energy at the lowest reasonable cost.
  
  
• Assure incorporation of national environmental protection goals in the formulation and implementation of energy programs, and to advance the goals of restoring, protecting, and enhancing environmental quality and ensuring public health and safety."

2. Energy Information Administration's "Energy Overview" data for 1997 show $567 billion spent nationwide for energy, while GDP was about $8.5 billion.