Utility Opting-Out of Efficiency Costs Consumers Billions

The Ohio legislature is weighing whether to allow more large customers, such as manufacturers, to leave customer-funded energy efficiency programs.

The energy efficiency program in Ohio is based on cash rebates that encourage homeowners, businesses, and industries to improve energy efficiency in an effort to reduce electricity consumption in the state. Currently the state legislature is deciding if large energy customers like industry should be able to opt-out from paying into these energy efficiency initiatives.

Past changes to Ohio energy efficiency programs gives context to upcoming proposals.

In 2014, the Ohio General Assembly had already made changes to the law to allow electric utilities to opt-out of the energy efficiency program for smaller customers like home owners. One Ohio utility, FirstEnergy, ended homeowner rebates that same year arguing that the program made electricity bills more expensive because customers had to pay into the program. Opponents of the change argue that the energy efficiency program lowers the amount of electricity used, decreasing demand and lowering electricity rates, and that FirstEnergy made to the move to reverse the decrease in demand. In a 2013 report from the Public Utilities Commission of Ohio, the regulatory body concluded that in 2012, for every $1 spent on energy efficiency, customers had saved more than $2 in power costs.

Proposed changes could cost the state billions.

Now the state is debating whether to expand this policy to exempt more customers. In a new research report the American Council for an Energy-Efficient Economy (ACEEE), has found that utility customers would pay a hefty price if more large customers were allowed to opt out of energy efficiency programs. When a large customer opts out, it no longer has to pay the programs’ costs. Fundamental fairness suggests that because these programs lower energy costs for everyone, everyone should pay for them. The policy would reduce opportunities for Ohio utilities to save energy and substantially increase costs for their customers, who have benefited from program savings for the past decade.

The primary benefit of energy efficiency programs is to reduce utility system costs. These costs include energy, generating capacity, and transmission/distribution infrastructure. An expanded opt-out would increase electric demand, leading to higher utility system costs. Increased costs would ultimately lead to higher electric rates and bills for all customers in Ohio.

ACEEE’s Ohio analysis focuses on a midrange scenario that assumes 35% of total customers opt out over the next 10 years. They estimate that utility system costs could increase by approximately $1.85 billion under an expanded opt-out. The majority of increased costs from the opt-out would be collected from all customers in Ohio through increased rates. There could also be cost impacts beyond what they estimated their the analysis. In a previous study, ACEEE estimated the value of market price suppression could exceed $2 billion by 2020 based on meeting Ohio’s original energy efficiency goals. All Ohio electric customers will have to pay these higher costs.

The Human Cost

Energy efficiency also reduces air pollution by lessening reliance on traditional power plants. Air emissions from fossil fuel power plants contain several harmful pollutants such as sulfur dioxide, nitrogen oxides, mercury, and particulate matter. These pollutants cause damage to human health. Several studies have quantified the economic value of health harms related to electric power pollution. An expanded opt-out would increase health-related costs because of an increase in traditional power plant air pollution.

ACEEE’s research estimates that the increased health costs for Ohio could be up to $1.27 billion under an expanded opt-out. The value is also based on the midrange scenario assuming 35% of total customers opt out over the next 10 years. Under this scenario, there would be an estimated increase of over 18,000 tons of SO2, 5,700 tons of NOx, 1,800 tons of PM 2.5, and 7.3 million tons of CO2.

Higher Bills for Large Electricity Customers.

Participating in energy efficiency programs can substantially reduce customer bills. These savings are invaluable to many businesses that seek to reduce costs. They also spur economic growth as businesses can reinvest instead of paying higher electricity bills.

Ironically, opting out of efficiency programs is likely to end up costing large customers more than $3.3 billion. While businesses are less likely to make investments with payback periods longer than two to three years, regulated utilities routinely make longer-term investments. By reducing project costs through utility rebates, companies can make investments they would not have made without the program.

Opt-out cost pile up for Ohio.

ACEEE analysis estimates substantial cost increases for Ohio: total utility system costs would exceed $1.85 billion from 2015 to 2024, increased health-related costs would exceed $1.2 billion, and customers would lose more than $3.3 billion in bill savings from not participating in programs. An expanded opt-out policy would also likely reduce jobs, lower the state gross domestic product (GDP), and stifle economic growth.

About ACEEE

The American Council for an Energy-Efficient Economy is a nonprofit organization that acts as a catalyst to advance energy efficiency policies by conducting in-depth technical and policy analyses, advising policymakers, and working collaboratively with businesses and government officials. ACEEE’s reputation is based on the high quality, credibility, and relevance of our work, as well as our bipartisan approach. ACEEE’s thorough and peer-reviewed technical work is widely relied on by policymakers, business and industry decision-makers, consumers, media, and other energy professionals.