Can better utility planning replace clean-energy standards?

By Andy Balaskovitz

A key component of energy proposals emerging from the Michigan legislature is that more robust long-term planning requirements for utilities can effectively replace renewable energy and efficiency standards.

Known as Integrated Resource Plans, Republicans in the House and Senate say requiring utilities to file these every three to five years will produce the most cost-effective resource mix into the future, eliminating the need for meeting goals under a renewable portfolio or energy efficiency mandate.

Formal IRPs are required in 28 states and come in various forms. Typically they are filed every two to five years and forecasts of supply, demand and other market factors can stretch upwards of 20 years.

While experts who follow clean-energy policies say such planning can be helpful in outlining long-term needs for utilities, some argue that – if the goal is expanding renewables or energy efficiency – IRPs are unable to produce the same results as clearly defined standards. Moreover, they are liable to become esoteric exercises in utility planning.

“It’s pretty apparent to those of us keeping a close eye on these types of things that an IRP process is not a substitute for renewable energy and energy efficiency standards,” said Sam Gomberg, Midwest energy analyst for the Union of Concerned Scientists.

“Standards really provide a tremendous amount of certainty of both utilities and the state to ensure these resources are brought online to a significant degree. The evidence is so clear that not only is it cost effective, but they also bring a lot of benefits to the ratepayer. An IRP can be a great complement to those standards.”

Chairmen of the House and Senate energy committees are both placing an emphasis on IRPs as Michigan’s 2008 renewable-energy law levels off at the end of this year. Utilities are on track to meet the 10 percent renewable standard on schedule.

H.B. 4298 is sponsored by Rep. Aric Nesbitt, the Republican chairman of the House Energy Policy Committee, and would require utilities to file IRPs with the Michigan Public Service Commission every five years.

Subject to MPSC approval, the plans would include nearly 20 different aspects of long-term planning. The state’s energy efficiency program would be rolled into the IRP and an energy optimization surcharge would be eliminated on ratepayers’ bills. The RPS would remain at 10 percent.

“Working through an Integrated Resource Plan, I believe, is a better system than looking at things separately in terms of mandates,” Nesbitt told reporters in early March, calling for a “holistic” approach to energy policy. “Cookie-cutter mandates need to be a thing of the past. A new IRP will allow us to take a broader approach to electric rates.”

While legislation has not yet been introduced in the Senate, Sen. Mike Nofs, the Republican chairman of that chamber’s energy committee, also is interested in a formal IRP process.

“Such a policy shall serve as the foundation for determining the best mix of resources to cost-effectively meet those [long-term energy] needs while also providing for prudent cost recovery,” according to Nofs’ tentative “comprehensive energy plan” document given to Midwest Energy News.

Both plans would allow outside parties to intervene in the process and present alternatives to regulators. Nesbitt has also spoken of “empowering” a citizens review board to represent ratepayers during the process.

“I understand everyone loves certainty, but the overall goal is to have a lot of flexibility,” Nofs said in early March. “We’re going to encourage that through the process of the IRP.”

Brad Klein, staff attorney with the Chicago-based Environmental Law and Policy Center, said market certainty is what has helped Michigan have successful renewable and efficiency programs.

“There is nothing inherently wrong with an IRP process – it’s good to have a clear planning process, but I think it has to be informed by clear goals,” Klein said. “Michigan’s RPS has been extraordinarily successful, really beyond what anybody expected with PA 295 and driving down [renewable energy] prices extremely quickly. That’s one of the important features of having clarity with targets and goals – there’s market transparency.”

Klein compared Minnesota – which has a renewable portfolio standard of 25 percent by 2025 and an IRP process – with Indiana, which requires an IRP but also has a voluntary RPS program that has resulted in less than 4 percent the state’s energy coming from renewables.

“You don’t see the same level of market growth,” Klein said. “There is a lot of uncertainty. Industry and stakeholders don’t really know what the utilities are planning for, what the goals of the state are. It keeps prices higher and a less-efficient market is grown.

“I don’t think [an IRP] is an effective replacement. It begs the question: What are you planning for? What are your goals? That’s the key part that’s missing.”

A spokesman for Consumers Energy said the utility is still studying the proposed IRP policies.

Gov. Rick Snyder announced his own energy goals in March that show what Michigan can accomplish in terms of renewables and energy efficiency without explicitly calling for heightened standards. However, his plan does emphasize efficiency investments, including reducing energy waste by 15 percent over the next 10 years.

Democrats, while not having introduced specific legislation, have indicated a desire to double Michigan’s RPS to 20 percent by 2022 and increase the energy efficiency standard to 2 percent.

Less incentive for energy efficiency
Energy-efficiency advocates say the sector would be especially hit should an IRP replace Michigan’s efficiency standard.

Martin Kushler, a senior fellow with the American Council for an Energy-Efficient Economy, reported in December a “striking” difference in efficiency spending and savings between states with standards and those without, regardless of whether there is an IRP requirement.

Kushler found “no statistically significant difference” in efficiency spending or savings between IRP and non-IRP states, while states with energy-efficiency standards had more than three times the amount of spending and savings compared to states without standards.

“It couldn’t be more clear, quite frankly,” Kushler said. “States that have energy efficiency standards save over three times the amount as states that don’t have efficiency standards. The data set and 30-plus years in the field tells me that having solid targets is by far producing much stronger results than states that are more voluntary.

“A lot of IRPs become paper exercises that don’t get translated into boots-on-the-ground energy efficiency programs. The push against the energy optimization program is driven by basically a philosophical objection to mandates. I’ve never seen them produce data whatsoever that energy optimization is not working or something else would work better.”

Gomberg added that efficiency standards are “completely different” than renewable standards in terms of getting utilities to invest in them.

“It goes against every bone in a utility’s body to do energy efficiency,” he said. “It’s like telling McDonalds not to sell hamburgers.”

Kushler concludes in his report: “Overall, the inescapable conclusion is that having an [energy efficiency standard] is clearly the most effective state policy driving energy efficiency program spending and savings in the U.S. utility sector today. There is little evidence that IRP alone produces meaningful energy efficiency results in the absence of other strong policies.”

Can lower renewable prices drive growth?
Another assertion made by Republicans in the Legislature is that the steady decline of renewable prices will allow the sources to compete in the market against natural gas without the need for a mandate.

Larry Ward, executive director of the Michigan Conservative Energy Forum – a coalition of Republicans and faith-based groups pushing for more renewables and energy efficiency – said he’s “not really sure” that more competitive prices and an IRP process will drive growth in renewables.

“These things really need to have teeth in them – you can’t hope that’s the way it will go,” he said. “At the end of the day, there are things that influence utilities. If you don’t make some kind of requirement or incentivize it enough, what’s their choice to do but make them more profit?

“The Republican mantra should be to let the market flourish. Well, it would go naturally if we had a natural market. We don’t have a natural market – we have a monopoly, folks, let’s all admit it,” Ward said.

Ward, who has participated in Nofs’ energy working group, said the senator is open to having some form of incentives play a role to encourage renewable development.

Klein, of the Environmental Law and Policy Center, agrees that certainty should play a critical role.

“Certainly these [renewable] technologies become really cost effective, but I think leaving it entirely to the market is not really the most efficient solution here,” Klein said. “It leaves market development so uncertain. You need that transparency, you need those clear goals. Then you can plan for that and do it with the best mix of resources. There is a more robust planning process if you know what you’re shooting for.”

Looking toward Indiana, the evidence is in the numbers, says Jesse Kharbanda, executive director of the Hoosier Environmental Council. Indiana has a voluntary renewable energy program along with requiring utilities to file Integrated Resource Plans every two years, effectively serving as its RPS program, he said.

“What you find is that Indiana trails all of the Midwest in renewable energy investment,” he said. “I think that’s the proof in the pudding that it’s an extremely un-compelling approach to drive investment in renewables.”

‘Manipulation’ and best practices
Gomberg, of the Union of Concerned Scientists, said one of the main criticisms against the IRP process is that stakeholders are simply reacting to plans put forth by utilities.

“It’s a world where the utility comes forward, they’ve done their analysis and here’s their plan,” he said.

Additionally, in some other states, Gomberg said stakeholders and ratepayers aren’t adequately represented before regulatory bodies, which also may be constrained in fully vetting plans.

“You end up with a situation that’s ripe for manipulation by utilities to skew things that are in their best interest and not the state’s,” Gomberg said.

Mariko Geronimo, senior associate with the Brattle Group, said a potential drawback of switching entirely from an RPS to an IRP “has the potential to create regulatory uncertainty and additional risks for renewable developers.

Also, IRPs are complicated, both analytically and logistically, and ideally they have many parties involved. A new IRP process may take some time to work smoothly, which could create a difficult transition period,” she said in an email. “Finally, stakeholder engagement and input would be very important to ensure political or other bias is not embedded in IRP assumptions and evaluation metrics for resource strategies”

However, given the political makeup of Michigan’s Republican-dominated legislature, formal standards may be a thing of the past either way.

“Given the legislature and tenor, I think this is the best we’re going to be able to do,” said Julie Metty Bennett, senior vice president of the Lansing-based Public Sector Consultants. Metty Bennett believes IRPs can be “really effective, but the devil is in the details. It would do a good job in coming up with the right assumptions, but where the rubber meets the road is the modeling effort to determine least-cost resources.”

As far as planning, the process now has “absolutely no transparency,” Metty Bennett added. “The Public Service Commission really doesn’t know anything about the planning utilities are doing.”

According to a 2013 report by Synapse Energy Economics, best practices in IRPs include “a meaningful stakeholder process and oversight from an engaged public utilities commission.”

Successful plans should detail “a load forecast, reserves and reliability, demand-side management, supply options, fuel prices, environmental costs and constraints, evaluation of existing resources, integrated analysis, time frame, uncertainty, valuing and selecting plans, action plan, and documentation,” the report says.

But while all of this could be important to planning a state’s energy future, Klein argues that this is not the policy that has led to success in renewables and efficiency here.

“I still have not heard anybody persuasively explain what the problem has been with the RPS that would require the state to change course at this point,” Klein said. “It has achieved all of its goals and more. It directly contradicted the criticisms that increasing renewables will increase costs – that has not been the case.

“When you have a proven, successful policy, it doesn’t make sense to make dramatic changes.”

Andy Balaskovitz reports for Midwest Energy News where this story first appeared.