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Energy Efficiency and Renewable Energy: A Three –Legged Stool with a Missing Leg

September 26, 2014 By Maria Brun, Graduate Research Fellow

Drafting and passing effective public policies is a tricky business that often ends with unexpected and potentially counterproductive results. Sometimes this is a reflection of our lack of understanding of the causes of specific human, environmental, or economic behavior that we seek to alter. Other times, policies can interact in puzzling ways. Though frustrating, these unexpected outcomes provide the empirical data to better understand and improve policymaking and illuminate how sometimes disparate processes or parts of human society interact.

The examples are plenty in energy and environmental policy where the systems policy interfaces with (utilities, ecosystems, climate, etc.) are particularly complicated and touch nearly every part of human life. I encountered one curious example last week involving common policy mechanisms to lower emissions/green the electricity grid worth exploration.

There are two main strategies promoted for tackling emissions and the environmental impact of electricity. On the demand side, energy efficiency and conservation reduce the total amount of energy consumed and the rate of energy demand growth even as the economy and population grows over time. In Minnesota, the broadest energy efficiency policies are the 1.5% retail sales savings goal and Conservation Improvement Program (CIP).

From a mixture of policy and market influences, energy efficiency gains in appliances, equipment, and buildings, annual growth in electricity demand decreased significantly in the second half of the twentieth century. Based on the Energy Information Administration’s Energy Outlook Reference Case, annual increases going forward is likely to level off around 0.9% through 2040. This adds up to a 29% increase in demand between 2012 and 2014.

Source: eia.gov

For comparison’s sake, if demand increased annually by the 1950’s rate of 9.8% during the same period, total demand for electricity would increase by a staggering 1270% between 2012 and 2040.

In Minnesota, total electricity consumption rose from just over 47,000 gigawatt hours (GWh) in 1990 to about 68,000 in 2012. Like the nation as a whole, the annual rate of increase in GWh consumed has trended down slightly, as shown by the red trend line in the graph below.

Source: Author's analysis of data from eia.gov

This reduction in demand growth has implications for energy security (think avoided energy imports), economic growth (think avoided energy costs), and emissions. A report from McKinsey and Company estimates that 1.1 gigatons of CO2 equivalent of greenhouse gasses could be avoided if energy efficiency measures were fully deployed. Bonus: on top of emissions savings, energy efficiency has the potential to net $1.2 trillion in operational and energy savings.

On the supply side, greening our electricity system means shifting away from traditional fossil fuel-based generation to renewable and clean generation. Though this can include coal with carbon capture and sequestration and, depending on point of view, nuclear energy, policy intervention generally has taken this to mean increasing the proportion of electricity generated by solar, wind, geothermal, and biomass technology.

In response to lower costs and policy mandates – namely state level renewable portfolio standards –renewable energy generation capacity has grown quickly. Renewables now account for around 12% of electricity generation. Renewable energy capacity is expected to increase by 69% by 2040 with a more than 140% increase in non-hydro renewable generation. This pushes renewables’ proportion of the energy portfolio up to 16% by 2040.

Minnesota’s Renewable Electricity Standard (RES) is one of the most aggressive in the nation; with more than a decade before the ultimate renewable energy goal has to be met, Minnesota already gets roughly 16% of its electricity from wind alone. Based on current policy, Minnesota is on track to have 27.4% of total electricity sales generated from renewable resources by 2025. This does not include the new 1.5% solar mandate and, depending on the political atmosphere and results of a feasibility study, could increase substantially if the RES goal is adjusted up to 40%.

Together, demand and supply side efforts are often seen as a complete, two-pronged policy package for greening electricity. Indeed, in Minnesota, emissions dropped 3% between 2005 and 2010 and are poised to continue on a downward trend thanks to efforts in energy efficiency and renewable energy.

But here’s where the interesting unintended policy side effect comes in. Energy efficiency is actually working against scaling up renewable and clean energy.

Consider this: The more efficiently we use energy, the slower demand grows. The slower demand grows, the less additional capacity we need to meet electricity demand. As a result, the total amount of capacity added per year is actually down significantly (though expected to tick back up sometime in the next decade). Of what capacity additions are forecasted to come online in the coming years, 73% will likely be natural gas power plants with renewables making up 24%.

Though this is a sizable piece of the pie, as needed capacity additions decreases, that 24% translates into a smaller and smaller total amount of generating capacity added. As a result, renewables stay a notable but small part of our generation portfolio.

That’s not to say that there are other factors that influence or limit the growth of renewable energy. Transmission issues, congestion, variability, cost, and resource availability all effect long term planning and moment to moment dispatch decisions as well. However, this curious policy interaction between two policies that seem to be complementary - energy efficiency and renewable energy policies – demonstrate that a two-pronged approach to reducing electricity-related emissions may not be sufficient if the goal is to rapidly decrease Minnesota’s GHGs. Instead, perhaps a three-pronged approach is necessary: efficiency, renewable energy, and addressing existing generation, particularly those plants that are the least efficient and most GHG intense. In most cases, this means retiring old coal plants.

In a study conducted by the Union of Concerned Scientists, coal plants nationwide were analyzed based on their efficiency, generation costs, pollution controls and updates needed. The results were then compared to alternatives such as renewable energy. The report concluded that between 16.4 and 59 GW of coal-fired generation capacity is ripe for retirement now, 680 MW of which is located in Minnesota.

Source: ucsusa.org

Plant retirement isn’t a new topic for policymakers or regulators, including Minnesota’s Public Utilities Commission. Coal-fired plants are a crucial piece of Minnesota’s energy system, supplying roughly 46% of Minnesota’ electricity and holding three spots on the list of top ten largest capacity plants in the state (5 are natural gas, some of which are converted coal plants). At the same time, the public is becoming more opposed to coal-fired plants, most notably the Sherco power plant, the 21st biggest polluter in the nation.

Simply retiring coal plants in Minnesota is not a feasible option in the short term. However, given the large proportion coal constitutes in Minnesota’s portfolio, making room for renewables and low carbon alternatives will have to mean taking a closer look at replacing coal.

The state is already looking into the feasibility of upping the Renewable Energy Standard to 40% and is consistently reevaluating energy efficiency programming. However, more emphasis, especially in light of new EPA existing power plant emission rules set to be finalized next year, should be given to developing a three-pronged approach to reducing electricity emissions by scaling up energy efficiency and renewable energy and carving out a bigger space for cleaner generation technologies by accelerating the retirement of old, fossil fuel-based plants.

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