Energy Efficiency and Alternative Energy Programs

Energy Efficiency and Alternative Energy Programs MAC TAylor • legislATive AnAlysT • DeCeMber 19, 2012 Summary California currently maintains over a dozen major programs that are intended to support the development of energy efficiency and alternative energy in the state. Over the past 10 to 15 years, the state has spent a combined total of roughly $15 billion on such efforts, the vast majority of which has been funded by utility ratepayers. The state’s incentive programs generally fall into one of the four following categories: (1) energy efficiency programs, (2) renewable energy programs, (3) alternative transportation and low-carbon fuels programs, and (4) energy research programs. In response to the Supplemental Report of the 2012-13 Budget Package, this report provides an overview of these different programs, as well as a preliminary assessment of them in terms of priority, overlap, and redundancy. Our review and preliminary assessment of the state’s major energy incentive programs finds that the state currently lacks a comprehensive framework that fully coordinates these activities to help ensure that the state’s goals are being achieved in the most cost-effective manner. The absence of such a comprehensive framework (1) results in some level of program duplication, (2) results in some departments making policy choices that may not be aligned to legislative priorities, and (3) makes it difficult to compare effectiveness across programs. In view of the above, we recommend that the Legislature develop a comprehensive strategy for meeting the state’s energy efficiency and alternative energy objectives. In general, the comprehensive strategy should specify (1) the state’s energy efficiency and alternative energy goals, (2) how programs should fit together to achieve the state’s goals, and (3) how program effectiveness will be measured. Such a strategy will be particularly important as the Legislature decides how to effectively invest the revenues generated from the state’s cap-and-trade auctions and the recent passage of Proposition 39. An LAO RepORt 2 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt IntroductIon California currently maintains over a dozen The Supplemental Report of the 2012-13 Budget major programs that are intended to support the Package directed our office to develop a report that development of energy efficiency and alternative (1) lists all programs and funding related to energy energy in the state. Since each of these programs efficiency and alternative energy, and (2) provide a began—which in a few cases was as early as 1979— preliminary assessment of these programs in terms the state has spent a combined total of roughly of priority, overlap, and redundancy. This report $15 billion on such efforts. For 2012-13, more than responds to this supplemental report language. $1 billion is estimated to be spent on the state’s In this report, we specifically discuss those state energy efficiency and alternative energy programs. programs that provide funding to incentivize the In addition, the revenues generated from the state’s development in energy efficiency and alternative “cap-and-trade” auctions and the recent passage of energy. Thus, we have not included the state’s Proposition 39 will further increase the amount of myriad regulations and standards associated with funding to support such programs in the coming energy efficiency and alternative energy, as well as years. The various energy efficiency and alternative those programs administered by municipal and energy programs are administered by multiple local government entities. We also identify a series state departments, including the California Energy of issues for legislative consideration in order to Commission (CEC), the California Public Utilities help the state more effectively meet its energy goals. Commission (CPUC), and the Air Resources Board In preparing this report, we consulted with various (ARB). state departments and relied heavily upon the program data that they were able to provide us. BAckground What Is Energy Efficiency and efficient appliances such as refrigerators, washers, Alternative Energy? and dryers. Consumers who use these more efficient products are able to get the same level of Energy Efficiency. In general, energy efficiency service while using less energy to do so. refers to the installation of energy efficient Alternative Energy. In comparison, technologies or measures that are designed to alternative energy refers to energy that comes from reduce energy usage and eliminate energy losses “renewable” sources—meaning sources that are not in homes and businesses. Thus, energy efficiency finite and do not use up natural resources like more incentive programs aim to reduce energy usage traditional forms of energy that rely on fossil fuels. while maintaining comparable service, thereby Such renewable sources include the sun, wind, and saving energy consumers money on their utility water. Renewable sources are generally considered bills. An example of a common energy efficiency to be cleaner and less polluting than traditional program is one that provides rebates to replace forms of energy. old, outdated appliances with newer, more energy www.lao.ca.gov Legislative Analyst’s Office 3 An LAO RepORt Energy Efficiency and Alternative Energy demand. Specifically, the plan indicated that the development in california demand should be met based on a “loading order”— energy efficiency, then renewable resources, and California has a long and extensive history lastly by cleaner, traditional sources of energy (such of pursuing energy efficiency and alternative as natural gas). In order to help meet this goal and energy development. In the wake of the Arab oil facilitate the development and adoption of energy embargo of the early 1970s, the state passed the efficiency and alternative energy, the state created Warren-Alquist Act of 1974, which declared that additional incentive programs. overdependence on petroleum-based fuels is a As we discuss below, these energy-related threat to the state’s energy security due to market incentive programs generally have multiple goals. and supply uncertainties. This act also declared For example, some programs focus on achieving that rapid growth of electricity demand could have immediate and direct benefits, while other negative environmental impacts. As such, the act programs focus on what is commonly referred also established the CEC to help the state reduce to as “market transformation”—a process of “wasteful, uneconomical, and unnecessary uses intervening in a market in order to bring about of energy in order to reduce the rate of growth of widespread, permanent change of that market. energy consumption and prudently conserve energy For example, such a program could attempt to resources.” From its inception, the CEC established facilitate a transformation of the state’s vehicle fleet building and appliance standards designed to by bringing down the cost of hybrid and electric reduce the state’s long-term energy consumption. vehicles. Such a program would require subsidizing As a result of the electricity crisis in 2000-01, these types of vehicles in order to make them the state refocused its efforts to meet a greater cost competitive with traditional vehicles. In the amount of the state’s energy demand through following section, we provide a detailed overview efficiency and alternative energy sources. In 2003, of the state’s major energy efficiency and alternative the state adopted its first Energy Action Plan which energy programs. described how the state should meet new energy ovErvIEW of MAjor StAtE EnErgy ProgrAMS In general, the state’s incentive programs Figure 1 summarizes the different programs, fall into one of the four following categories: which we describe in more detail below. The figure (1) energy efficiency programs, (2) renewable indicates that a total of $15 billion has been spent energy programs, (3) alternative transportation on these programs over the last 10 to 15 years. and low-carbon fuels programs, and (4) energy E E P nErgy fficiEncy rograms research programs. While these programs are supported from different funding sources, the vast As previously discussed, energy efficiency majority of total spending is funded from utility typically refers to the installation of energy ratepayers. In addition, as we discuss, some of efficient technologies or measures to reduce energy these programs have been evaluated in terms of usage and eliminate energy losses. As indicated their cost-effectiveness at reducing energy demand. in Figure 1, a total of about $9.5 billion has been 4 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt spent specifically on energy efficiency programs. past several years, the CPUC has issued decisions Currently, the state has three major incentive aimed at creating a policy framework to expand programs related to energy efficiency. the energy efficiency programs administered by the state’s IOUs—Pacific Gas and Electric, Southern Investor-owned utility (Iou) Energy California Edison, and San Diego Gas and Electric. Efficiency Programs—cPuc For example, in 2008, the CPUC adopted a Purpose. Public Utilities Code Section 454.5 Long-Term Energy Efficiency Strategic Plan. In this requires utility companies to first meet their plan, the commission established goals for achieving “unmet resource needs through all available energy all cost-effective energy savings across all major efficiency and demand reduction resources that sectors in California, as well as to compel sustained are cost effective, reliable, and feasible.” Over the market transformation. As part of its plan, the Figure 1 Major State Energy Efficiency and Alternative Energy Programs (In Thousands) Cumulative Category/Program Department 2012-13 Funding to Date Energy Efficiency IOU Energy Efficiency Programs CPUC $1,000,000 $9,000,000 Energy Efficiency Financing Program CEC 3,440 274,000 Federally Funded Energy Efficiency Programs CEC 1,930 261,000 State Energy Program (1,930) (226,000) Energy Efficiency Block Grants — (35,000) Totals $1,005,370 $9,535,000 Renewable Energy Public Interest Renewable Energy Program CEC — $1,564,000 Existing Renewable Facilities — (450,000) Emerging Renewable Facilities — (513,000) Consumer Education — (16,000) New Renewable Resources — (585,000) Go Solar California Program CPUC/CEC $232,900 1,629,000 California Solar Initiative (156,400) (1,500,000) New Solar Homes Partnership (76,500) (129,000) Self Generation Incentive Program CPUC 83,000 970,000 Clean Energy Upgrade Financing Program CAEATFA 1,100 25,000 Totals $317,000 $4,188,000 Advanced Transportation and Low-Carbon Fuels Alternative and Renewable Fuel and Vehicle CEC $122,320 $378,000 Technology Program Air Quality Improvement Program ARB 28,000 109,000 Sales and Use Tax Exclusion (SB 71) CAEATFA 100,000 196,000 Totals $250,320 $683,000 Energy Research Public Interest Energy Research Program CEC $44,500 $556,000 Grand Totals $1,617,190 $14,962,000 IOU = Investor-Owned Utility; CPUC = California Public Utilities Commission; CEC = California Energy Commission; CAEATFA = California Alternative Energy and Advanced Transportation Financing Authority; and ARB = Air Resources Board. www.lao.ca.gov Legislative Analyst’s Office 5 An LAO RepORt CPUC authorized a significant increase in funding low-interest loan program for public entities for energy efficiency programs administered by (such as cities, counties, public schools, special the IOUs. Specifically, CPUC has overseen the districts, and hospitals) to finance energy efficiency development and implementation of programs and energy generation projects. Specifically, the in three-year cycles, such as rebate and incentive program provides a fixed interest rate of 1 percent programs for residential, commercial, industrial, for the term of the loan, which must be repaid and agricultural energy users in order to encourage within 15 years. The maximum loan amount is the purchase of energy-efficient appliances and $3 million. In order to be eligible for financing, equipment. These types of programs are intended an applicant must provide evidence that the to achieve both short- and long-term goals. For proposed project will result in producing a greater example, some of the programs seek to implement benefit in terms of energy demand reduction than cost-effective energy efficiency measures that will the project’s cost. In other words, there must be have an immediate benefit. In comparison, some demonstrable net savings associated with the of the programs seek to achieve long-term market project. Approved projects have included lighting transformation. For example, the IOUs are currently systems; light-emitting diode (LED) streetlights implementing pilot programs to encourage the and traffic signals; energy management systems development of “zero net energy” buildings. A zero and equipment controls; building insulation; net energy building produces as much renewable and heating, ventilation, and air conditioning energy on-site as it uses when measured over a given equipment. year. This is achieved through the use of advanced Funding. Funding for the Energy Efficiency architectural design and construction techniques Financing Program is provided from the Energy which are intended to minimize the building’s Efficiency Conservation Account, which was energy consumption. The long-term goal of the established in 1979. This account was initially program is to transform how new buildings are supported by the state General Fund and later designed and built, thus creating the potential for with federal funds from the American Recovery substantial energy savings in the long run. and Reinvestment Act (ARRA) of 2009. Since Funding. As indicated in Figure 1, CPUC the program was initiated, a total of more than has authorized a total of about $9 billion on IOU $274 million has been provided to approximately energy efficiency programs since they were initiated 770 public entities. For 2012-13, the CEC estimates in 1998 and substantially expanded in 2006. As it will spend about $3.4 million on the program. previously discussed, the majority of these funds federally funded Energy have been provided over three-year funding cycles. Efficiency Programs—cEc In 2012-13, $1 billion is estimated to be spent on such programs. Funding for these programs comes Purpose. Under ARRA, the state received from electricity and natural gas rates that are a one-time influx of federal funds totaling collected from ratepayer utility bills, as well as a $314 million for energy efficiency related activities. public goods charge that we discuss in detail below. These funds are used by CEC to support primarily two state energy efficiency programs—the State Energy Efficiency financing Program—cEc Energy Program and the Energy Efficiency Block Purpose. The Energy Efficiency Financing Grant Program. The goals of these two programs Program, which is administered by CEC, is a include stimulating economic growth and job 6 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt creation, achieving measurable energy benefits, Portfolio Standard (RPS), California has the goal and helping to meet California’s energy and of increasing the percentage of renewable energy environmental goals. in the state’s electricity mix to 33 percent by 2020. To support this and other related renewable energy • State Energy Program. The State Energy goals, the state has spent a total of about $4.4 billion Program helps support existing residential on various programs that seek to incentivize the and commercial building energy production of renewable energy. Currently, the state efficiency—as well as water efficiency— administers four major incentive programs related retrofits. Under a competitive application to renewable energy. process, local government entities, nonprofit and for-profit organizations can Public Interest renewable apply for program funding based on the Energy Program—cEc type of building that will be retrofitted. In Purpose. The Electric Utility Industry addition, the program provides low-interest Restructuring Act (Chapter 854, Statutes of 1996 loans and grants to eligible private sector [AB 1890, Brulte]), widely referred to as AB 1890, businesses that either (1) use biomass authorized, among other things, the Public material to produce biomethane gas or Interest Renewable Energy Program to support the (2) manufacture and/or assemble energy operation of existing renewable facilities as well as efficient or renewable energy products. the development of new and emerging renewable • Energy Efficiency Block Grant Program. technologies. Since its inception, the program, The Energy Efficiency Block Grant which is administered by CEC, has supported the Program provides funds to small cities, following categories of renewable energy activities: counties, and local government entities for • Existing Renewable Facilities. The Public various energy efficiency projects. Such Interest Renewable Energy Program helps projects include lighting retrofits, building subsidize in-state energy production upgrades, and mechanical equipment. from existing renewable sources, in order Funding. At this time, a total of $226 million to increase the competitiveness of these in ARRA funds has been appropriated for the State sources with that of natural gas-fired power Energy Program and $35 million on the Energy plants. For example, a large majority of the Efficiency Block Grant Program. For 2012-13, about funds have been used to support the state’s $1.9 million is estimated to be spent on the State biomass power plants which, in general, Energy Program, but no funding is scheduled to would operate at a net loss without the be spent for the Energy Efficiency Block Grant. subsidy. The remaining ARRA funds have been spent on • Emerging Renewable Facilities. The relatively smaller programs. program also supports emerging renewable r EnEwablE E nErgy P rograms facilities, specifically, the development of a self-sustaining market for renewable energy As previously indicated, renewable or technologies in distributed generation alternative energy refers to the use of renewable applications. For example, the program resources (such as wind and solar) to produce provides rebates to purchasers, lessors, electricity. Under the state’s current Renewables www.lao.ca.gov Legislative Analyst’s Office 7 An LAO RepORt or sellers of eligible electricity generating “go Solar california” Program—cPuc and cEc systems for on-site generation. From 2007 Purpose. In 2007, the state established a through 2011, the program provided program known as Go Solar California. The goal of incentives for purchasing and installing the program is to develop 3,000 megawatts (MW) small wind systems and fuel cells using a of solar generating capacity by 2020. Specifically, renewable fuel. the program consists of the following two components. • Consumer Education. The program has also supported efforts to educate • California Solar Initiative (CSI). The consumers, generate public interest about CSI, which is administered by the CPUC, renewable energy resources, as well as provides cash back for solar energy systems build and maintain a market for renewable of less than 1 MW to existing and new power through consumer education. commercial, industrial, government, nonprofit, and agricultural properties. In • New Renewable Resources. The Public addition, CSI offers incentives based on Interest Renewable Energy Program has the amount of natural gas or electricity also sought to incentivize the building of displaced by solar water heating systems. renewable electricity generation projects in These particular incentives are available for California. Initially, the program allocated residential, multifamily, and commercial funds to the lowest bidders during properties. three competitive solicitation processes. Subsequently, financial production • New Solar Homes Partnership (NSHP). incentives (called supplemental energy The NSHP, which is administered by payments) were offered through 2008 to CEC, offers incentives to builders of new cover the above-market costs of meeting residential construction to encourage them the state’s RPS. to include solar installations in IOU service areas. Funding. In order to fund the Public Interest Renewable Energy Program, AB 1890 authorized a Funding. The Go Solar California program temporary surcharge on IOU electricity bills. This is funded through utility rates. Since 2007, the surcharge is commonly referred to as a “public program has provided a total of about $1.6 billion goods charge.” From 1998 through 2011, a total of in incentives—$1.5 billion for CSI and $129 million about $1.6 billion from this surcharge was spent for NSHP. on the Public Interest Renewable Energy Program. Self-generation Incentive We note that the public goods charge was not Program (SgIP)—cPuc reauthorized by the Legislature and, thus, funding for the program expired at the end of 2011. The Purpose. Chapter 329, Statutes of 2000 Governor has directed the CPUC to continue (AB 970, Ducheny), established SGIP, which collection of a similar surcharge (referred to as the is administered by CPUC and offers up-front “electric program investment charge”) in order to capital and performance-based incentives for maintain funding for the Public Interest Renewable qualifying distributed energy systems. Qualifying Energy Program. 8 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt technologies include wind turbines, waste heat a dvancEd T ransPorTaTion and to power technologies, internal combustion l ow -c arbon f uEls engines, gas turbines, fuel cells, and advanced The state also administers programs that energy storage systems. Currently, the program are intended to expand the use of advanced also focuses on greenhouse gas (GHG) reductions. transportation and low-carbon fuels. Advanced Specifically, the CPUC, in consultation with ARB, transportation refers to technologies, such as is required to identify distributed energy resources electric vehicles and ultralow emission vehicles, that could help meet the state’s GHG reduction that reduce the use of energy. Low-carbon fuels are goals. fuels that have a carbon intensity that is lower than Funding. The SGIP is currently funded from traditional fuels and, thus, have lower emissions utility rates. Each year, $83 million is collected to associated with their usage. As required under support the program. The CPUC has authorized Chapter 371, Statutes of 2005 (AB 1007, Pavley), this particular funding level through 2014. As the CEC—in partnership with ARB—prepared a indicated in Figure 1, since the establishment of state plan to increase the use of alternative fuels in the program, a total of roughly $1 billion has been California. As discussed below, the state currently collected for SGIP. administers three major incentive programs related to advanced transportation and low-carbon fuels. clean Energy upgrade financing Program— california Alternative Energy and Advanced Alternative and renewable fuel and transportation financing Authority (cAEAtfA) vehicle technology Program—cEc Purpose. Chapter 9, Statutes of 2011 (ABX1 14, Purpose. Chapter 750, Statutes of 2007 Skinner), established the Clean Energy Upgrade (AB 118, Núñez), commonly referred to as AB 118, Financing Program, which provides up to created the Alternative and Renewable Fuel and $25 million for CAEATFA to administer loan loss Vehicle Technology Program. Specifically, the reserves for financial institutions that provide loans legislation required the CEC to “develop and deploy for energy improvements on residential properties. innovative technologies that transform California’s (The CAEATFA is an authority within the State fuel and vehicle types to help attain the state’s Treasurer’s Office.) By participating in the program, climate change policies.” In doing so, CEC provides financial institutions receive an initial 15 percent grants and loans for the development of alternative reserve contribution for each qualified loan fuels and related technologies including electricity, enrolled in the program. Under current law, the ethanol, renewable diesel, natural gas, hydrogen, CAEATFA may provide up to 100 percent coverage and biomethane. Authorization for the program is on qualified loan defaults. The goal of the program scheduled to expire December 2015. is to increase access to retrofit financing. Funding. The Alternative and Renewable Funding. Funds were initially derived from Fuel and Vehicle Technology Program is funded the public goods charge to support the Clean through fees on state vehicle registrations, vessel Energy Upgrade Financing Program through the registrations, and identification plates, as collected Renewable Resource Trust Fund. To date, a total by the Department of Motor Vehicles. Since it of $25 million has been made available for this was established in 2007, a total of $378 million program. has been spent. As indicated in Figure 1, the CEC www.lao.ca.gov Legislative Analyst’s Office 9 An LAO RepORt is estimated to spend about $122 million on the hydrogen fuel production, electric vehicle battery program in 2012-13. manufacturing, and biomass processing and fuel production. The CAEATFA has the authority to Air Quality Improvement provide up to $100 million in tax exclusions on an Program (AQIP)—ArB annual basis. As illustrated in Figure 1, roughly Purpose. Assembly Bill 118 also directed ARB $200 million in tax exclusions have been provided to create the AQIP, an incentive program that to date. is intended to improve air quality by providing E r nErgy EsEarch funding for the purchase of light-duty vehicles, hybrid and zero-emission trucks, as well as other Finally, the state funds research in the types of equipment that are less polluting. Each energy sector that focuses on (1) creating greater year, ARB creates a funding plan for expending the efficiencies in traditional energy delivery systems AQIP funds, which are appropriated each year to and (2) developing new alternative forms of energy. ARB in the annual state budget. The funding plan As we discuss below, the state’s major energy establishes ARB’s priorities for the funding cycle, research program is the Public Interest Energy describes the projects ARB intends to fund, and Research (PIER) program. We also note that sets funding targets for each project. the University of California spends a significant Funding. Funding for AQIP comes from smog amount of money on research related to energy abatement fees and vehicle registration fees. Since efficiency and alternative energy. While some of 2009, a total of $109 million in incentives have been this research is supported with PIER funding, provided for on and off-road equipment projects; other fund sources include federal funding from projects to mitigate off-road gasoline exhaust; lawn the Department of Energy. For example, Lawrence and garden equipment replacement; and medium- Berkeley National Laboratory, which conducts and heavy-duty vehicle/equipment projects a wide range of energy-related research, has an including lower emission school buses, electric, or annual budget of roughly $800 million in federal hybrid vehicles/equipment. funds. Advanced transportation and Alternative PIEr Program—cEc Source Manufacturing Sales and use tax Purpose. Prior to deregulation of the state’s (Sut) Exclusion Program—cAEAtfA electricity markets in 1996, most energy research Purpose. Chapter 10, Statutes of 2010 (SB 71, was driven by utilities themselves and coordinated Padilla) authorized CAEATFA to approve SUT through the national Electric Power Research exclusions on property that is used for the design, Institute (EPRI). Through EPRI, utilities were able manufacture, production, or assembly of advanced to pool resources in order to advance technological transportation and alternative energy technologies. development and understanding in the area of Funding. To date, the program has approved electricity generation, delivery, and use. During SUT exclusions for entities in the following fields: this time, California’s IOUs were allowed to recover electric vehicle manufacturing, solar photovoltaic costs associated with this research activity through manufacturing, landfill gas capture and the rate-making process at the CPUC. Under a production, biogas capture and production (dairies newly deregulated system, however, there was a and waste water treatment plants), demonstration concern that IOUs would have an incentive to cut 10 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt costs and thus limit spending on research. In order evaluation found that IOU programs achieved a to address this concern, AB 1890 specified that a benefit-cost ratio of 2.67 in 2004-05—meaning portion of the public goods charge would fund a that the benefit of reducing energy consumption new public interest energy research, development, through these programs is greater than the cost and deployment program—referred to as the PIER associated with implementing it. We note, however, program. that the most recent evaluation found that the The PIER program, which is administered by programs only achieved an estimated benefit-cost CEC, provides grants for research to develop, and ratio of 1.36. While this outcome is positive, it is help bring to market, energy technologies that a decline from prior years, which suggests that benefit the environment, provide greater system the state is now receiving diminishing returns on reliability, lower system costs, and provide other these particular energy efficiency investments. The tangible benefits to California electric and natural CPUC has acknowledged such diminishing returns gas utility customers. Specifically, the program and plans to transition its focus to programs that has supported (1) renewable energy research, have a more long-term market transformation goal. (2) environmentally preferred advanced energy However, CPUC also acknowledges that such a generation research, (3) residential and commercial goal may not be cost-effective in the short run, but building energy efficiency research, (4) advanced hopes that it will be cost-effective in the long run. transportation research, and (5) climate change The CPUC also contracted out for an evaluation research. of the CSI program in 2011 to determine whether Funding. The PIER program has been funded the program was achieving its stated goal of creating from the public goods charge. Since the program’s a self-sustaining market for solar. The evaluation inception, a total of $556 million has been spent also examined the cost-effectiveness of the program. on the program. As previously discussed, since the The evaluation found that from 2007 through the public goods charge was not reauthorized by the end of 2010 the program provided incentives to Legislature, the Governor has directed CPUC to nearly 55,000 sites, which equals 689 MW in small collect an electric program investment charge to solar installations. This is roughly 40 percent of support energy research, as well as other related the program’s goal of 1,940 MW of installed solar efforts. capacity by 2016. The analysis found that even with declining installation costs, grid-supplied electricity P E rogram valuaTions is still less expensive than solar. Many of the energy efficiency and alternative Assembly Bill 109 requires the CEC to conduct energy programs discussed above are required to an evaluation of the Alternative and Renewable report certain information on a periodic basis. For Fuel and Vehicle Technology Program. The the most part, these reports focus on how program evaluation must include the expected benefits and funds were spent (such as the specific projects that overall contributions toward promoting a transition were funded and how much money was allocated to alternative fuels. The CEC completed its initial to each project). Some of the programs, however, do evaluation in 2011. While this evaluation included include an evaluation component that focuses on some initial findings, it is difficult to isolate what the cost-effectiveness of that program. For example, the program’s effect will be on transforming the CPUC contracts out for an annual evaluation California’s fuel and fuel vehicles in the long run. of the IOU energy efficiency programs. One such www.lao.ca.gov Legislative Analyst’s Office 11 An LAO RepORt n Ew f unding for E nErgy E fficiEncy and mitigation fee is used and the adverse effects related a lTErnaTivE E nErgy P rograms to the activity on which that fee is levied. Therefore, in order for their use to be valid as mitigation fees, As discussed above, the state has and continues revenues from the cap-and-trade auctions must be to spend a significant amount of funds on programs used only to mitigate GHG emission or the harms related to energy efficiency and alternative energy. caused by GHG emissions. In the near future, new funding will be available For 2012-13, the administration is required to support such programs as a result of the to provide an expenditure plan for the auction state’s cap-and-trade auctions and the passage of revenues to the Legislature prior to expenditure Proposition 39 by the voters in November 2012. of these funds. In determining the allocation of cap-and-trade Auction revenue cap-and-trade auction revenues, the Legislature will want to consider the state’s energy efficiency The Global Warming Solutions Act of 2006 and alternative energy programs that currently (Chapter 488, Statutes of 2006 [AB 32, Núñez/ focus on reducing GHG emissions. Pavley]), commonly referred to as AB 32, established the goal of reducing GHG emissions Proposition 39— statewide to 1990 levels by 2020. Among other clean Energy job creation fund provisions, the legislation directed the ARB to Proposition 39, starting in 2013, eliminates the develop a plan to meet this goal. As part of its ability of multistate businesses to choose the way in plan to reduce California’s GHG emissions, ARB which their taxable income is determined. Instead, developed a cap-and-trade program that sets an most multistate businesses will have to determine aggregate limit or “cap” on total GHG emissions their California taxable income using a single sales allowed. In order to comply with the regulation, factor method. Consequently, some corporations a “covered entity” must obtain one allowance will pay higher taxes, resulting in projected for every ton of emission that it emits in a given half-year revenues of $450 million in 2012-13 and compliance period. While some of the allowances an estimated $1 billion per year thereafter. Under will be given away for free, the program includes the measure, half of the annual revenues—up to quarterly auctions of carbon allowances. $550 million—will be deposited into a new Clean The 2012-13 budget assumed a total of Energy Job Creation Fund to support projects $1 billion in revenue would be generated from the intended to improve energy efficiency and expand cap-and-trade auctions in 2012-13. However, the the use of alternative energy for a five-year period state’s first cap-and-trade auction, which was held (2013-14 through 2017-18). in November 2012, only raised about $55 million Specifically, Proposition 39 states that the in revenues for the state. As such, the amount of funds in the Clean Energy Job Creation Fund auction revenue that will be generated in 2012-13 could be used to support: (1) energy efficiency will likely be significantly less than assumed in the retrofits and alternative energy projects in public budget. Based on an opinion that we received from schools, colleges, universities, and other public Legislative Counsel, the revenues generated from facilities; (2) financial and technical assistance for ARB’s cap-and-trade auctions would constitute energy retrofits; and (3) job training and workforce “mitigation fee” revenues. As a result, a clear development programs related to energy efficiency nexus must exist between an activity for which a 12 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt and alternative energy. The Legislature will funded projects must be coordinated with CEC and determine spending from the fund and is required CPUC and (2) creates a new nine-member oversight to use the monies for cost-effective projects run board to annually review and evaluate spending by agencies with expertise in managing energy from the fund. projects. Proposition 39 also (1) specifies that all StAtE LAckS coMPrEhEnSIvE StrAtEgy for EnErgy EffIcIEncy And ALtErnAtIvE EnErgy In recent years, some attempt has been made is another reason why many of them have similar by the different state departments to coordinate goals. Such program duplication can be inefficient the state’s energy policies. For example, in 2010, and wastes valuable resources. Minimizing the state’s energy-related departments developed program duplication and overlap would create the California Clean Energy Implementation greater efficiencies and effectiveness in the state’s Plan, which is essentially a coordinated roadmap energy efficiency and alternative energy efforts. to achieve the state’s energy goals. Despite these Efforts May Not Be Aligned to Legislative efforts, our review and preliminary assessment of Priorities. Our review also found that some the state’s major energy incentive programs finds programs have been developed without legislative that the state currently lacks a comprehensive direction. The largest of such programs are the framework that fully coordinates these activities to IOU energy efficiency programs administered by help ensure that the state’s goals are being achieved the CPUC. Many of these IOU programs have in the most cost-effective and cost-efficient manner. the goal of fundamentally transforming markets. The absence of such a comprehensive Achieving such a long-term goal requires upfront framework (1) results in some program duplication, costs that generally outweigh the short-term (2) results in some departments making policy benefits that might be achieved. As previously choices that may not be aligned to legislative noted, CPUC plans to shift the emphasis of its priorities, and (3) makes it difficult to compare the energy efficiency programs even more so towards effectiveness across programs. market transformation activities. The absence Program Duplication. Administration of a comprehensive framework makes it difficult and oversight of the state’s numerous energy to determine whether such a major shift in programs is complicated by the fact that multiple California’s energy policy is aligned with legislature departments have overlapping jurisdiction in priorities. energy policy areas. As a result, some of these Difficult to Evaluate Effectiveness Across programs have similar goals and duplicative Programs. While some of the energy efficiency functions. For example, both CEC and CPUC and alternative energy programs we reviewed administer energy efficiency programs as well as have an evaluation component, the state has not renewable energy programs. Additionally, both methodically assessed all of these programs. CEC and ARB administer portions of the programs As such, the state does not currently evaluate established in AB 118. The fact that these programs the relative cost-effectiveness of all programs. generally were created piecemeal over the years Such an evaluation would include a comparison www.lao.ca.gov Legislative Analyst’s Office 13 An LAO RepORt of programs’ marginal costs of achieving the The existence of common evaluation methods state’s energy goals and, thus, would help provide would help the Legislature better understand the program feedback for policymakers. In addition, investments it is making in energy efficiency and given that there are multiple departments alternative energy and what the impact would be if involved in administering the various programs, it decided to reduce or increase its investments in departments have developed their own set of particular programs. This is particularly important evaluation metrics and methods specific to their given that the Legislature will need to decide programs—making it difficult to compare the how to invest the additional funding that will be relative effectiveness of one program to another. available from the cap-and-trade auctions and Thus, it is currently difficult for the Legislature to Proposition 39. ensure that the state is expending resources where it can get the biggest bang for its buck. dEvELoPIng A coMPrEhEnSIvE StrAtEgy In view of the above, we recommend that the Governor’s proposed budget. In general, the the Legislature develop a comprehensive strategy comprehensive strategy should specify: for meeting the state’s energy efficiency and • State’s Energy Efficiency and Alternative alternative energy objectives. Given that the Energy Goals. First, the plan should state has numerous programs administered by identify specific goals that the state’s multiple departments, we recommend that the energy efficiency and alternative energy Legislature designate a lead agency to develop efforts are attempting to achieve. In order such a comprehensive strategy. We find that to ensure that these goals are aligned with the CEC would be in the best position to lead legislative priorities, it will be important the development of this strategy, since it is the for the Legislature to provide guidance to state’s primary energy policy planning agency. CEC on what the statewide goals should In addition, CEC could develop such a strategy be. For example, the Legislature will want as part of its existing Integrated Energy Policy to weigh in as to whether the focus should Report (IEPR) process. Under current law, CEC is be on achieving short-term, immediate required to develop a biennial IEPR that provides benefits versus more long-term market information on trends and issues concerning transformation benefits. electricity and natural gas, transportation, energy efficiency, renewables, and public interest • How Programs Fit Together to Achieve energy research in the state. Accordingly, we State’s Goals. The plan should also discuss recommend that the Legislature adopt legislation how the objectives of each energy efficiency requiring CEC to develop—in coordination with and alternative energy program are aligned other relevant departments (such as CPUC and to state’s energy goals. In other words, the ARB)—a comprehensive strategy to be submitted objectives of a given program should be for legislative consideration by January 2014 with linked to one or more of the state’s goals. 14 Legislative Analyst’s Office www.lao.ca.gov An LAO RepORt Moreover, in order to minimize program • How Program Effectiveness Will Be duplication, the plan should outline how Measured. Finally, the plan should specify the different programs fit together as part how each program will be evaluated of an overall strategy for increased energy against one another based on a common efficiency and the use and development of metric to determine the most cost-effective alternative energy. In addition, the plan approaches for meeting the state’s energy should review the proposed use of cap-and- goals. This type of analysis—which trade auction revenues and Proposition 39 probably should be contracted out revenues. As previously discussed, the for—should include a comparison of administration will be presenting an the incremental costs and benefits of all expenditure plan to the Legislature programs. We acknowledge there would regarding cap-and-trade auction revenues likely be some cost associated with this and a newly created oversight board will approach. Given the billions of dollars be reviewing possible uses of the Clean being expended on such programs, Energy Job Creation Fund established by this type of analysis would provide the Proposition 39. A comprehensive plan will Legislature greater insight into the relative help ensure that the future use of these effectiveness of the state’s current energy funds is in the most cost-effective manner. programs. www.lao.ca.gov Legislative Analyst’s Office 15 An LAO B R I E F LAO Publications This brief was prepared by Tiffany Roberts and reviewed by Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This brief and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 16 Legislative Analyst’s Office www.lao.ca.gov