Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

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Energy Efficiency in Buildings: Critical

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June 24, 2009

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R40670

CRS Report for Congress

Prepared for Members and Committees of Congress

Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

Summary

Federal policymakers are debating a range of potential initiatives to limit U.S. emissions of

carbon dioxide (CO2). The American Clean Energy and Security Act of 2009 (H.R. 2454), for

example, would set a target of reducing U.S. greenhouse gas emissions, including CO2 emissions,

17% below 2005 levels by 2020. In the electricity industry, increasing the energy efficiency of

buildings is viewed by many as the measure with the greatest potential to reduce CO2 emissions

quickly and at relatively low cost. In light of the efficiency initiatives the federal government has

taken since the 1970s, questions arise as to what additional policies might be considered to

achieve more ambitious efficiency goals under a national policy of carbon control.

In November 2007, a congressionally-mandated advisory committee released a report examining

barriers to the deployment of greenhouse gas reducing technologies and practices, including

energy efficiency. The report, Carbon Lock-In: Barriers To Deploying Climate Change

Mitigation Technologies, identified the following six “critical” barriers to end-use efficiency in

buildings: industry structure, incomplete/imperfect information, high (first) costs, technical risks,

market risks, and unfavorable utility fiscal policies.

Looking back on key federal efficiency statutes in the context of the Carbon Lock-in report, it

seems that congressional policies since 1975 have been focused persistently on the critical

barriers of industry structure, imperfect information, and high first costs. Congress has a history

of addressing technical risk, too, by encouraging technology demonstration, although this issue

appears to have been a lower priority over the last few years. In successive statutes, Congress has

attempted to “push the envelope” in these four areas through ever tighter efficiency standards,

new financial incentives, and other measures. Congress has a more limited history of addressing

unfavorable rate policies among utilities. Until 2009, this history could be characterized as a

single significant, but largely ineffective, attempt to advance efficiency-oriented utility rates

under the Energy Policy Act of 1992 (P.L. 102-486). However, new rate provisions in the

American Recovery and Reinvestment Act (P.L. 111-5) are another significant attempt to lower

utility rate policy barriers, although it will be years before Congress can gauge their effects.

Market risks, especially energy price risks, seem to have received relatively little policy attention

from Congress to date. It stands to reason that uncertainty about the future price of energy would

complicate decisions about building efficiency investments, and could deter conservative building

owners from considering all but the most highly cost effective improvements. As it happens,

recent U.S. energy price volatility is at historic highs. Market evidence suggests that energy price

uncertainties may be having a greater negative impact on the nature and timing of building

efficiency investments in the private sector than is commonly understood. In the context of

building energy efficiency, there may be many policy options available to reduce energy price

uncertainty, but there has been relatively little identification or consideration of them in the policy

community. Neither the American Clean Energy and Security Act of 2009 (H.R. 2454), now

under consideration, nor any other current legislative proposals contain these kinds of provisions.

Using the “critical” barriers from the congressionally mandated Lock-in report as a guide, it

appears that significant policy gaps remain with respect to utility rate policies and market risks.

To the extent that these barriers continue to impede private investment in building efficiency, they

may reduce the likelihood of achieving federal targets for carbon control associated with

efficiency. Therefore, policymakers may benefit from a complete and integrated understanding of

the full set of barriers to building efficiency and the range of carbon outcomes they imply.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

Contents

Introduction...................................................................................................................................... 1

Energy Efficiency and Conservation ............................................................................................... 2

Electricity Efficiency Potential .................................................................................................. 2

Impacts from Efficiency Initiatives ........................................................................................... 3

Critical Barriers to Energy Efficiency ....................................................................................... 4

Industry Structure ................................................................................................................ 5

Incomplete/Imperfect Information ...................................................................................... 6

High First Costs................................................................................................................... 7

Technical Risks ................................................................................................................... 7

Market Risks ....................................................................................................................... 7

Unfavorable Fiscal Policies ................................................................................................. 8

Critical Efficiency Barriers and Federal Policy ............................................................................... 8

Historical Focus of Buildings Efficiency Policy ....................................................................... 9

Federal Policy Towards Efficiency Market Risks ................................................................... 10

Policy Considerations for Energy Price Uncertainty......................................................... 13

Utility Fiscal (Rate) Policy Issues ........................................................................................... 14

Policy Considerations for Utility Rate Barriers ................................................................ 16

Discussion ...................................................................................................................................... 16

Implications for U.S. Carbon Goals ........................................................................................ 18

Figures

Figure 1. Complexity in the Buildings Supply Chain ...................................................................... 6

Figure 2. Recent Volatility in U.S. Natural Gas Prices .................................................................. 11

Figure 3. Historical Average Weekly Coal Commodity Spot Prices.............................................. 11

Figure 4. Energy Efficiency Cost Effectiveness Scenarios ............................................................ 12

Tables

Table 1. Barriers to Energy End-Use Efficiency in Buildings ......................................................... 5

Table 2. Building Efficiency Provisions in Key Federal Statutes .................................................... 9

Table A-1.Building Efficiency Provisions in Key Federal Statutes ............................................... 20

Appendixes

Appendix........................................................................................................................................ 19

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

Contacts

Author Contact Information........................................................................................................... 21

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

Introduction

Federal policymakers are debating a range of potential initiatives for reducing atmospheric carbon

dioxide (CO2) emissions from U.S. energy sources. Legislative proposals would seek to limit U.S.

CO2 emissions to specific (historical) levels through emissions caps, carbon taxes, or other

regulatory mechanisms. Many of these proposals dictate or anticipate a declining long-term

trajectory for annual U.S. carbon emissions. The Obama administration proposes cutting U.S.

greenhouse gas emissions, including CO2 emissions, 14% from 2005 levels by 2020.1 The

American Clean Energy and Security Act of 2009 (H.R. 2454), which is viewed as the most

widely discussed such legislative proposal in Congress, would set a more aggressive goal of

reducing U.S. greenhouse gas emissions 17% below 2005 levels by 2020. Other proposals to

reduce U.S. carbon emissions to specific levels are found in the Cap and Dividend Act of 2009

(H.R. 1862), the Clean Environment and Stable Energy Market Act of 2009 (H.R. 1683), the

America’s Energy Security Trust Fund Act of 2009 (H.R. 1337), and the Safe Markets

Development Act of 2009 (H.R. 1666).2

An overarching policy issue which arises from carbon control proposals is how the CO2 reduction

targets could be achieved. Numerous analysts have been examining this question and have

identified specific measures to reach particular targets—especially in the electricity industry,

which is responsible for nearly 40% of U.S. carbon emissions. In the electricity sector, these

measures typically include some combination of energy efficiency, renewable energy, nuclear

power, advanced fossil-fuel power generation, carbon capture and sequestration, plug-in hybrid

electric vehicles, and distributed energy resources.3 Key among these is end-use energy

efficiency, which is viewed by many as the measure with the greatest potential to reduce CO2

emissions quickly and at relatively low cost.4 According to Secretary of Energy Steven Chu,

“energy efficiency, energy conservation are where the greatest gains will be.”5 Residential and

commercial buildings, especially existing stock, are considered a particularly rich target for

electricity efficiency improvements, as the two sectors combined account for 40% of primary

energy consumption in the United States.6 H.R. 2454 contains key sections promoting electricity

efficiency in buildings as a means of reaching the bill’s carbon emissions targets.7

U.S. Office of Management and Budget, Budget of the U.S. Government: Fiscal Year 2010, Budget Overview, May 7,

2009, p. 100, http://www.whitehouse.gov/omb/assets/fy2010_new_era/A_New_Era_of_Responsibility2.pdf.

For further analysis, see CRS Report R40556, Market-Based Greenhouse Gas Control: Selected Proposals in the

111th Congress, by (name redacted), (name redacted), and (name redacted).

Barbara Tyran, Electric Power Research Institute, “The Power to Reduce CO2 Emissions: The Full Portfolio,” Slide

presentation, May 15, 2008, p. 7, http://www.iea.org/Textbase/work/2008/roadmap/2a_Tyran_EPRI%20Roadmaps.pdf.

See, for example: Richard Cowart, “Carbon Caps and Efficiency Resources: How Climate Legislation Can Mobilize

Efficiency and Lower the Cost of Greenhouse Gas Emission Reduction,” 33 Vermont Law Review 201-223, 2008;

McKinsey & Company, Inc., Reducing U.S. Greenhouse Gas Emissions: How Much at What Cost?, December 2007.

Secretary of Energy Steven Chu, Remarks before the Energy Information Administration 2009 Energy Conference: A

New Climate for Energy, Washington, DC, April 7, 2009.

U.S. Energy Information Administration, Annual Energy Outlook 2009 with Projections to 2030,

DOE/EIA0383(2009), March 2009, fig. 36. Primary energy is defined as “energy in the form that it is first accounted

for in a statistical energy balance, before any transformation to secondary or tertiary forms of energy. For example, coal

can be converted to synthetic gas, which can be converted to electricity; in this example, coal is primary energy,

synthetic gas is secondary energy, and electricity is tertiary energy” (U.S. Energy Information Administration, “Energy

Glossary – P,” n.d., http://www.eia.doe.gov/glossary/glossary_p.htm).

Title II.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

But increasing the efficiency of buildings is not a new priority in the United States. Indeed,

Congress has recognized the benefits of electricity efficiency in buildings, and the challenges of

capturing those benefits, since the Energy Policy and Conservation Act of 1975 (P.L. 94-163). To

date, federal initiatives in building energy efficiency have been somewhat effective, but not as

much as they would need to be to achieve the steep CO2 reductions anticipated under H.R. 2454.

It is widely believed that much greater electricity savings are available through additional

building efficiency improvements. However, analysts have identified a number of critical socioeconomic and policy barriers which have historically limited the impact of federal and state

building efficiency programs. This report describes those barriers, the degree to which federal law

has addressed them, and their implications for meeting future U.S. carbon reduction targets.

Although this report focuses on electricity efficiency in buildings, there are other opportunities

for energy efficiency related to buildings that may also offer significant opportunities for

atmospheric CO2 reductions. These include improved energy efficiency in transportation (to and

from buildings), reducing direct use of fossil fuels in buildings, and reducing energy use or

carbon emissions associated with building materials and construction (e.g., steel and concrete).

Analysis of some of these options is provided in CRS Report R40147, Issues in Green Building

and the Federal Response: An Introduction, by (name redacted).

Energy Efficiency and Conservation

The term “energy efficiency” can mean different things in different contexts. For the purposes of

this report, “energy efficiency” means that an energy conversion device, such as a household

appliance or an elevator, uses less energy while providing the same level of service for a building

(e.g., cooling, lighting, motor drive). Efficiency improves when the device undergoes a technical

modification, or through the use of certain design changes such as better insulation, thermal

windows, improved ventilation, and solar orientation.8 The energy-saving result of an efficiency

increase is referred to as “energy conservation.”

Electricity Efficiency Potential

Baseline improvements in energy efficiency occur over time as an economic response to changes

in energy prices, the availability of new technology, turnover in end-use equipment, and other

factors. Beyond these baseline improvements, conservation studies since the 1970s have

identified substantial additional potential for energy efficiency. One analysis in 1976 stated,

technical fixes in new buildings can save 50 percent or more in office buildings and 80

percent or more in some new houses.... [B]y 1990, improved design of new buildings and

modification of old ones could save a third of our current total national energy use—and

save money too.9

Strictly speaking, “conservation” means “avoiding waste,” but the term is typically used interchangeably with

“efficiency” in the energy policy context, as it is in this report. “Efficiency” and “conservation” contrast with

“curtailment” or “load management” which decrease output (e.g., turning down the thermostat) or services (e.g.,

driving less) to decrease energy use at specific times. Curtailment is often employed as an emergency measure.

Amory B. Lovins, “Energy Strategy: The Road Not Taken?” Foreign Affairs, Vol. 55 No. 1 (October 1976).

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

A 1981 study by the Solar Energy Research Institute10 likewise found that “through energy

efficiency, the U.S. could achieve a full-employment economy and increase worker productivity,

while reducing national energy consumption by nearly 25 percent.”11 The study further concluded

that “the consumption of electricity can be reduced to a point where, on a national basis, demands

through the end of the [twentieth] century can be met with generating equipment now operating

or in advanced stages of construction.”12

More recent studies continue to identify significant untapped electricity conservation potential.

The “Five Lab Study” in 1997 estimated a technical electricity savings potential of approximately

23%, and a maximum “achievable” potential of 15% among residential and commercial

buildings, assuming aggressive policies promoting conservation and a carbon cost of $50/metric

ton (1993 dollars).13 A 2004 meta-analysis by the American Council for an Energy-Efficient

Economy of several regional studies reported a technical electricity conservation potential of

33%, and an achievable potential of 24% over a 5 to 15 year time horizon, depending upon the

study.14 The U.S. Department of State’s 2006 Climate Action Report concludes that “by using

commercially available, energy-efficient products, technologies, and best practices, many

commercial buildings and homes could save up to 30 percent on energy bills.”15

Impacts from Efficiency Initiatives

Both federal and state agencies have implemented a multitude of initiatives over the last 40 years

to capture energy efficiency potential in the electricity sector. These initiatives have included

appliance, equipment, and building efficiency standards; electric utility-administered

conservation incentives;16 consumer information campaigns; and other programs.

Notwithstanding these efforts, the levels of incremental electricity conservation actually achieved

since the 1970s have been more modest than the 25%-30% suggested in conservation potential

studies. A 2004 analysis examining a comprehensive range of both federal and utility-sponsored

conservation and energy efficiency programs (including federal efficiency standards)

administered through 2000 concluded as follows:

[P]rograms for which ex post quantitative estimates of energy savings exist are likely to have

collectively saved up to 4.1 quads of electricity annually. These estimates typically reflect

the cumulative effect of programs (e.g., all appliance efficiency standards, past and present)

Now the National Renewable Energy Laboratory.

Solar Energy Research Institute (SERI), A New Prosperity: Building a Sustainable Energy Future, Brick House

Publishing, Andover, MA, 1981, p. 1.

Ibid, p. 2.

Interlaboratory Working Group on Energy-Efficient and Low-Carbon Technologies, Scenarios of U.S. Carbon

Reductions: Potential Impacts of Energy-Efficient and Low-Carbon Technologies by 2010 and Beyond, 1997, pp. 3.33.4, http://enduse.lbl.gov/projects/5lab.html. The five laboratories are Oak Ridge National Laboratory, Lawrence

Berkeley National Laboratory, Pacific Northwest Laboratory, Argonne National Laboratory, and the National

Renewable Energy Laboratory. $50/metric ton of carbon is equivalent to approximately $13.60/metric ton of CO2.

Steven Nadel, Anna Shipley and R. Neal Elliott, “The Technical, Economic and Achievable Potential for EnergyEfficiency in the U.S. – A Meta-Analysis of Recent Studies,” Proceedings of the 2004 ACEEE Summer Study on

Energy Efficiency in Buildings, American Council for an Energy-Efficient Economy, Washington, DC, 2004.

U.S. Department of State, U.S. Climate Action Report—2006, July 2007, p. 40.

Commonly referred to as “demand-side management” or “DSM” programs.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

on annual energy consumption. This total energy savings represents about 6% of annual

nontransportation energy consumption.... 17

A study of California’s 2001 energy demand reduction initiative (promoted heavily as an

emergency measure to avoid blackouts during the state’s electricity crisis) reported 6% reduced

electricity usage compared to the prior year, although only a portion of this reduction was

“attributable to savings from energy efficiency or onsite generation projects ... likely to persist for

many years.”18 Consistent with these studies, a 2008 analysis by EPRI projected a “realistic” U.S.

end-use electricity savings potential of 7% beyond baseline levels which would occur without

additional market intervention.19 A 2007 study by the McKinsey Global Institute found a savings

potential from improved efficiency of well over 20% in the residential and commercial sectors,

but projected that policies in place at the time would lead to an annual capture rate of under

0.5%.20

Critical Barriers to Energy Efficiency

Taken together, the studies of technical conservation potential and actual conservation impacts

suggest a perpetual opportunity for incremental electricity conservation on the order of 25%—

more than four times the savings such programs have actually realized. Moving beyond the 5% to

7% electricity savings range, however, has been a persistent challenge to conservation

proponents.

Students of end-use markets have long been puzzled by the lack of adoption of ostensibly

cost-effective energy efficiency technologies. A rich literature has developed around this

question, and evidence for various barriers to adoption of efficiency technologies is

widespread.21

Seeking the most current perspectives on these barriers, along with other constraints on CO2

emissions reduction, Congress established an advisory committee under the Energy Policy Act of

2005 (P.L. 109-58) to “develop recommendations that would provide for the removal of domestic

barriers to the commercialization and deployment of greenhouse gas intensity reducing

technologies and practices.”22 The advisory committee released its report, Carbon Lock-In:

Barriers To Deploying Climate Change Mitigation Technologies (hereinafter referred to as the

Lock-in report) in November 2007. The report lists 10 categories of potential barriers inhibiting

the deployment of a range of greenhouse gas reduction technologies, identifying those barriers

Kenneth Gillingham, Richard G. Newell, and Karen Palmer, Retrospective Examination of Demand-Side Energy

Efficiency Policies, Resources for the Future, RFF DP 04-19 REV, June 2004, revised September 2004, pp. 63-64.

Charles A. Goldman, Joseph H. Eto, and Galen L. Barbose, California Customer Load Reductions during the

Electricity Crisis: Did they Help to Keep the Lights On?, Lawrence Berkeley National Laboratory, LBNL-49733, May

2002, pp. iii, 20.

Michael Howard, Senior Vice President, “Electric Power Research Institute, Energy Efficiency: How Much Can We

Count On?” Presented at the Edison Foundation Conference, Keeping the Lights On: Our National Challenge, April

21, 2008, p. 14, http://www.edisonfoundation.net/events/2008-04-21/EPRIPresentation.pdf.

Florian Bressard et al., Curbing Global Energy Demand Growth: The Energy Productivity Opportunity, McKinsey

Global Institute, May 2007.

J.G. Koomey, C.A. Webber, C.S. Atkinson, and A. Nicholls, “Addressing Energy-Related Challenges for the U.S.

Buildings Sector: Results from the Clean Energy Futures Study,” Energy Policy, Vol. 29, No. 14 (November 2001):

1211.

§1601(g)(1)

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

considered “critical” or “important” for particular options. The report’s findings related

specifically to end-uses in buildings are summarized in Table 1.

Table 1. Barriers to Energy End-Use Efficiency in Buildings

Critical

Important

Other

Industry Structure

External Benefits and Costs

Infrastructure Limitations

Incomplete/Imperfect Information

Lack of Specialized Knowledge

High (First) Costs

Policy Uncertainty

Technical Risks

Market Risks

Unfavorable Fiscal Policies

Source: Marilyn A. Brown, Jess Chandler, Melissa V. Lapsa, Benjamin K. Sovacool, Carbon Lock-In: Barriers To

Deploying Climate Change Mitigation Technologies, Oak Ridge National Laboratory, ORNL/TM-2007/124,

November 2007, Revised January 2008, pp. 101-102, 124.

While by no means an original list, Table 1 is unusual in segregating the barriers according to

general importance.23 All 10 barriers to energy efficiency listed above likely warrant policy

attention, but understanding and overcoming the six barriers considered critical may be a priority.

This report adopts the critical barriers in Table 1 as an organizing structure because the Lock-in

report which produced them was prepared specifically at the direction of Congress and because

the barriers as a whole are consistent with those identified in prior analyses. As in all such lists of

barriers, their separation into distinct categories may be somewhat artificial. In reality, there may

be interactions among specific categories (e.g., incomplete information and lack of specialized

knowledge) which defy clear separation. Nonetheless, for purposes of policy analysis, this list of

barriers can serve as a useful basis for examining related federal statutes in an organized way. The

critical barriers as characterized by the Lock-in report, as well as similar studies, are discussed in

more detail below.

Industry Structure

The Lock-in report identifies industry structure as the “most important” of the critical barriers to

building efficiency. Industry structure in this context refers to a complex and fragmented set of

decision-making relationships involving numerous stakeholders (e.g., investors, owners,

occupants, builders, architects, equipment manufacturers, lenders, code setters, and realtors)

whose interests in efficiency may not align.24 A 1996 Lawrence Berkeley National Laboratory

study likewise found that among “the most vexing issues for energy efficiency policies” is “the

variety of institutions and firms that influence energy use.”25 A 2007 international study by the

See, for example, similar analysis in: National Round Table on the Environment and Sustainable Development

Technology Canada, Geared for Change: Energy Efficiency in Canada’s Commercial Building Sector, Ottawa, ON,

Canada, 2009, pp. 21-30; and in: Howard Geller and Sophie Attali, “The Experience with Energy Efficiency Policies

and Programmes in IEA Countries: Learning from the Critics,” International Energy Agency, IEA Information Paper,

August 2005, p. 23.

Brown et al., 2008, p. 101.

William H. Golove and Joseph H. Eto, Market Barriers to Energy Efficiency: A Critical Reappraisal of the Rationale

for Public Policies to Promote Energy Efficiency, LBL-38059, UC-1322, Lawrence Berkeley National Laboratory,

March 1996, pp. xii-xiii.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

World Business Council for Sustainable Development reached similar conclusions. The council’s

report graphically illustrates the complex nature of relationships among the various stakeholders

affecting building efficiency decisions, as shown in Figure 1.

Figure 1. Complexity in the Buildings Supply Chain

Source: World Business Council for Sustainable Development, Energy Efficiency in Buildings: Business Realities and

Opportunities, Summary Report, Geneva, August, 2007, p. 10.

One important set of difficulties arising from the industry structure in Figure 1 are “principalagent” problems associated with efficiency investments, wherein the parties responsible for

choosing end-use equipment are not financially responsible for its energy costs. In the residential

rental market, for example, landlords may choose not to install efficient appliances for their

tenants—who must pay the bills to run them. Similarly home builders, in order to keep down

construction costs, may choose not to use the most energy-efficient windows or insulation

options—at the expense of the home’s future buyer who will pay higher utility bills.26 These and

other problems associated with industry complexity and fragmentation make increasing building

efficiency a challenge because it can be difficult to act upon so many decision processes

comprehensively, coherently, and effectively using targeted public policy instruments.

Incomplete/Imperfect Information

The Lock-in report identifies incomplete and imperfect information about the cost-effectiveness

and availability of efficient technologies as another critical barrier to improved building

efficiency. As an earlier study stated, “Cost-effective energy efficiency measures are often not

undertaken as a result of lack of information on the part of the consumer, a lack of confidence in

the information, or high transaction costs for obtaining reliable information.”27 In the residential

sector, the Lock-in report cites the lack of end-use energy consumption information in typical

utility bills as obscuring the cost-effectiveness of end-use efficiency improvements. In the nonresidential sector, the complexity of buildings makes it hard to determine to what extent any

Scott Murtishaw and Jayant Sathaye, Quantifying the Effect of the Principal-Agent Problem on US Residential

Energy Use, Lawrence Berkeley National Laboratory, LBNL-59773 Rev, August 12, 2006, p. 2.

Ernst Worrell Lynn Price, “Barriers and Opportunities: A Review of Selected Successful Energy-Efficiency

Programs,” MS: 90-4000, Lawrence Berkeley National Laboratory, p. 2, http://ies.lbl.gov/iespubs/47908.pdf.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

particular building is energy efficient, and consequently, what measures have what potential to

improve that building’s efficiency.28

High First Costs

The Lock-in report finds that “consumers are often reluctant to pay more upfront to purchase

products with lower life cycle costs, especially when lenders do not credit them for lower utility

bills later.”29 Consistent with this finding, a 2009 survey of commercial building professionals

reported that 73% of respondents considered first cost the most significant barrier to the adoption

of high-efficiency lighting systems.30 Changes in building design, technology selection, and

building controls face similar obstacles when they involve higher initial costs, even if the changes

are clearly cost-effective investments over time. Some consumers, such as low-income

households and small businesses, have limited access to credit, face high financing costs, and

often have difficulty calculating life cycle costs to evaluate efficiency investments.31 In a 2009

joint survey of facility managers by Johnson Controls and the International Facility Management

Association, 63% of respondents cited either capital availability, payback period, or return on

investment as the top barrier to achieving energy efficiency.32

Technical Risks

To the extent that energy efficiency measures involve changes in building technologies, the Lockin report finds that insufficient validation of their performance leads to a perception of technical

risk. Moreover, the cost-effectiveness of advanced technologies, in particular, can be situationspecific and hard to predict. 33 One example of the latter barrier is the adjustable speed motor

drive (ASD), which has potential application in reducing energy use significantly in many motordriven end uses, especially water pumping and building air handling systems. While ASDs have

great efficiency potential, the cost to implement them may vary greatly in advanced applications.

As one university extension program has concluded, the cost of a basic ASD installation may

“easily” more than double when accounting for unique application requirements, special features,

advanced controls, and other factors.34 A combination of technical riskiness and cost uncertainty

deters many businesses from implementing new efficiency measures in place of “tried and true”

technologies.

Market Risks

The Lock-in report identifies market risks as uncertainties about the lifecycle costs of competing

technologies, and uncertainties about the development and availability of new technology in the

Brown et al., 2008, p. 101.

Brown et al., 2008, p. 102.

“First Cost, Client Pushback Biggest Barriers To Adoption Of High-Efficiency Lighting Systems, Say BD+C

Readers,” Building Design + Construction, March 1, 2009.

Brown et al., 2008, p. 37.

Johnson Controls and International Facility Management Association (IFMA), Energy Efficiency Indicator, 2009

Findings, May 6, 2009, p. 15, http://johnsoncontrols.mediaroom.com/file.php/3719/JCI+EEI_2009_findings.pdf.

Brown et al., 2008, p. 102.

Washington State University, Cooperative Extension, Energy Efficiency Fact Sheet: Adjustable Speed Motor Drives,

2003, p. 2, http://www.energy.wsu.edu/documents/engineering/motors/motordrvs.pdf.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

marketplace, among other considerations. 35 In the case of building efficiency, acceptance of

efficient technologies is also hindered specifically by energy price uncertainties and concerns

related to irreversible investments.36 The former has been a particular challenge due to recent

volatility in U.S. natural gas and coal prices, for example, which are principal fuels for electricity

generation. Regarding irreversible investments, building owners may be reluctant to make longterm commitments to new technologies during a period of rapid technical change. This is

analogous to waiting an extra two years to replace an office computer system with the expectation

that microprocessor performance will greatly improve in the meantime.

Unfavorable Fiscal Policies

The fiscal impediments to energy efficiency identified by the Lock-in report primarily are rooted

in the rate structures of electric utilities. The report cites the lack of cost-recovery mechanisms for

utility efficiency investments, utility revenue erosion from efficiency improvements, and lack of

de-coupling of utility profits from sales as “critical” disincentives to building efficiency. 37 The

rates an electric utility charges its electricity customers typically tie a utility’s recovery of fixed

costs to its sales of electricity.

This system of price cap regulation discourages even the most economical [efficiency]

investments if they are likely to reduce throughput. As sales go down, the utility’s

shareholders or customer-owners lose dollars with every unsold kilowatt-hour. To actively

encourage or promote demand- or supply-side resources installed on the customer side of the

meter ... would undermine the institution’s financial health.38

Since electric utilities are thought to have great influence on the electricity use and the investment

behavior of their customers, such financial disincentives for utilities are seen as broadly

hampering, or at least not facilitating, activities to improve building end-use efficiency.

Critical Efficiency Barriers and Federal Policy

Given the set of critical barriers identified in the Lock-in report—prepared at the behest of

Congress—it seems logical to review federal building efficiency policies in the context of these

barriers. In particular, a review of the Lock-in analysis invites the question: How have federal

statutes on building efficiency addressed the critical barriers in the Lock-in report? To explore this

question, CRS has categorized building efficiency provisions in key federal statutes according to

the six critical barriers discussed above. In performing this analysis, we reviewed the original

statutory language and, in some cases, associated committee reports to determine the legislative

intent of statutory provisions that were relevant to energy efficiency in buildings. Based upon this

review, we judged which provisions appeared to address at least some part of the critical Lock-in

barriers as described in the report. Statutory provisions clearly addressing more than one barrier

category were identified with the multiple barriers.

Brown et al., 2008, p. 24.

Brown et al., 2008, p. 102.

Sheryl Carter, “Breaking the Consumption Habit: Ratemaking for Efficient Resource Decisions,” The Electricity

Journal, December 2007, p. 67.

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Table 2 summarizes the exercise, identifying with an “X” in the appropriate columns, whether the

key federal statutes contain provisions aligned with critical efficiency barriers. Note that such

categorization can be subjective, and some provisions address more than one barrier, so the

inclusion of certain provisions in one category versus another could be debated. Note also that

provisions for largely unrestricted grants to state-run building efficiency programs could not be

specifically categorized and, therefore, were excluded from the analysis.39 Despite these caveats,

Table 2 offers a number of key insights about the trajectory of congressional policy promoting

energy-efficient buildings over the last 35 years, as discussed below. A detailed version of this

table, listing specific sections from each statute that are relevant to this analysis, is provided in the

Appendix (Table A-1).

Table 2. Building Efficiency Provisions in Key Federal Statutes

CRITICAL BARRIERS

KEY STATUTES

P.L. 94-163

Industry

Structure

Incomplete/

Imperfect

Information

High

(First)

Costs

P.L. 95-618

Technical

Risks

Market

Risks

Unfavorable

Fiscal

Policies

P.L. 95-619

P.L. 96-294

P.L. 100-12

P.L. 102-486

P.L. 109-58

P.L. 110-140

P.L. 110-343

P.L. 111-5

Source: CRS analysis

Historical Focus of Buildings Efficiency Policy

As Table 2 shows, Congress has a substantial and sustained history of policy intervention for

three of the critical barriers in the Lock-in report. Beginning with the Energy Policy and

Conservation Act of 1975 (P.L. 94-163) Congress has enacted policies addressing efficiency

barriers due to industry structure, imperfect information, and high first costs. In the case of

industry structure, these initiatives have focused largely on promulgating ever-stricter equipment

efficiency standards and building codes, promoting state efforts to improve building efficiency,

and mandating efficient practices for federal buildings. In the case of imperfect information,

federal initiatives have promoted studies of conservation potential in buildings, energy audits,

public education, and labeling programs. In the third case, grants, tax credits, and loan programs

have been offered to help offset first cost barriers for efficiency measures, especially in the lowincome residential sector.

See, for example: P.L. 109-58 § 123 “State Energy Programs.”

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

Congress began addressing the technical risk barrier somewhat later than the first three barriers.

Although some technology demonstration measures were enacted under the National Energy

Conservation Policy Act of 1978 (P.L. 95-619), Congress pursued technical risk policies more

vigorously in the Energy Policy Act of 1992 (P.L. 102-486) and subsequent statutes. For all of

these critical barriers, one can debate the nature, breadth, and significance of the policy

intervention—but it is clear that Congress has had ongoing concern about the issues and has

periodically revisited them in response to changing building sector conditions.

In contrast to the building efficiency barriers above, Congress does not have a history of sustained

statutory initiatives addressing either unfavorable fiscal policies or market risk. The Energy

Policy Act of 1992 included important provisions related to the role of electric utilities in

promoting end-use efficiency, but the effects of those provisions were ultimately limited.

Additional statutes related to fiscal policies are discussed later in the report. Congress appears to

have taken little, if any, action to address market risks as defined in the Lock-in study. If one

accepts that overcoming fiscal policies and market risk is critical to improving U.S. building

efficiency, congressional treatment of these two barriers warrants further examination.

Federal Policy Towards Efficiency Market Risks

As noted above, the Lock-in report identifies energy price uncertainties and concerns about

irreversible investments as key barriers to building efficiency. Energy price uncertainty is

probably the greater barrier, because it drives the cost-effectiveness of efficiency measures both

from an individual end-user’s perspective and from a broader social perspective.

It stands to reason that uncertainty about the future price of energy would complicate decisions

about building efficiency investments, and could deter conservative building owners from

considering all but the most highly cost effective improvements. As it happens, recent U.S.

energy price volatility is at historic highs. The price of natural gas illustrates this point. Natural

gas is a key fuel for electric power generation, especially during peak hours, so natural gas price

in some regions can be a significant determinant of electricity prices. As Figure 2 shows, natural

gas price volatility this decade has been staggering. According to the Energy Information

Administration, “[a]s a result of wide swings, the range in average monthly wellhead prices for

[2008] was the widest in history.”40

Energy Information Administration, Natural Gas Year-In-Review 2008, Online report, April 23, 2009,

http://www.eia.doe.gov/pub/oil_gas/natural_gas/feature_articles/2009/ngyir2008/ngyir2008.html.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

Figure 2. Recent Volatility in U.S. Natural Gas Prices

Source: Energy Information Administration, “U.S. Natural Gas Wellhead Price,” Internet database, April 29,

2009, http://tonto.eia.doe.gov/dnav/ng/hist/n9190us3M.htm.

Coal prices have also become extremely volatile in most U.S. coal-producing regions, as shown

in Figure 3. Coal-fired generation accounts for approximately 50% of electricity produced in the

United States, so coal prices are a key driver of U.S. electricity prices.

Figure 3. Historical Average Weekly Coal Commodity Spot Prices

Source: U.S. Energy Information Administration, “Coal New and Markets,” Internet page, June 1, 2009,

http://www.eia.doe.gov/cneaf/coal/page/coalnews/coalmar.html.

Notes: Coal prices shown are for a relatively high heat content coal selected in each region, for delivery in the

quarter following the current quarter.

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Relatively limited volatility of energy prices through the late 1990s may partly explain the lack of

congressional attention to this issue in its historical efficiency statutes—energy price uncertainty

may have only emerged as a critical efficiency barrier this decade. In the current energy market,

however, where prices for some energy commodities can change by a factor of two or three in a

matter of months, consumers face difficulties evaluating the lifecycle costs and cost-effectiveness

of energy efficiency investments. In the short run, retail electricity prices—which generally are

regulated—may partly insulate end-users from volatility in wholesale prices for generation fuel.

But over the long run, electricity rates must ultimately reconcile with generation fuel costs, so the

trajectory of those future costs is still a key concern for efficiency measure cost-effectiveness,

even at the end-use level. An increase in natural gas-fired generation in response to future carbon

costs may make volatility in natural gas prices, specifically, an even greater influence on retail

electricity costs.

From a social perspective, other energy market factors may exacerbate energy price uncertainty

and its implications for the cost-effectiveness of building efficiency. Slowing growth of electricity

demand, such as during the current economic downturn, may lower electricity prices by changing

the supply-demand balance, and may also change which generation units supply the marginal

demand for power. Uncertain energy prices and electricity load growth, taken in combination, can

have great implications for the cost effectiveness of building efficiency measures. An analysis by

Exelon Corporation demonstrates the potential effect of these factors, estimating the utility’s cost

of avoided carbon emissions (an alternative measure of cost-effectiveness) by increasing end-use

energy efficiency among its customers (Figure 4). The “blocks” in the figure represent distinct

categories of efficiency investment. As Figure 4 shows, whereas energy efficiency more than

pays for itself under high natural gas prices as experienced in July 2008, most efficiency

measures cost in excess of $25 per metric ton of avoided CO2 under a scenario with low natural

gas prices and low electric load growth.

Figure 4. Energy Efficiency Cost Effectiveness Scenarios

Electric Utility Perspective

Sources: Adapted from John W. Rowe, Chief Executive Officer, Exelon Corp., “Energy in a Carbon

Constrained World,” Presentation to the Energy Information Administration 2009 Energy Conference: A New

Climate For Energy, Washington, DC, April 7, 2009; Paul Elsberg, Senior Communications Specialist, Exelon

Corp, Personal communication, May 29, 2009.

*Low gas price is a function, in part, of low load growth.

The costs of any future restrictions on atmospheric CO2 emissions also exacerbate energy price

uncertainty if those costs are not clearly established in advance. A carbon tax, or cap-and-trade

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

allowance program, ultimately should encourage efficiency investments by raising their costeffectiveness relative to energy supply options that continue emitting CO2. Uncertainty about the

carbon costs, however, simply adds another degree of variability to future energy prices, and, in

this respect, may make it harder for building owners to make efficiency commitments. Carbon

policies complicate efficiency investment calculations and may encourage delay in implementing

cost-effective efficiency measures to see how energy prices will trend when carbon costs and

market responses are factored in. As one Johnson Controls executive reportedly has stated,

following the company’s joint survey with the International Facility Management Association,

We see a wide distribution of views about what will happen to energy prices—ranging from

a 100 percent increase to a 60 percent decrease.... This uncertainty appears to be another

reason business leaders are holding back on [energy efficiency] investments.41

Market evidence, therefore, suggests that energy price uncertainties may be having a greater

negative impact on the nature and timing of building efficiency investments in the private sector

than is commonly understood.

Policy Considerations for Energy Price Uncertainty

Energy price uncertainty presents a challenge to government policymakers because it is usually

driven by global, competitive market forces beyond the reach of policy instruments available to

any single national authority. As unanticipated volatility in U.S. gasoline prices demonstrated last

year, Congress may have few options to moderate energy commodity price swings driven by

global supply and demand—even when there may be a compelling national interest to do so.

Notwithstanding the competitive drivers of energy commodity prices, Congress has, in some

cases, considered or enacted policies to shield energy producers or consumers from energy price

swings to ensure the economic viability of their investments. For example, in the 110th Congress,

provisions in the proposed Coal Liquid Fuel Act would have provided federal price guarantees for

coal liquefaction projects “resolving uncertainties in the long-term outlook for oil prices that ...

inhibited the flow of private capital into coal-to-liquids facilities.”42 The Alaska Natural Gas

Pipeline Act of 2004 provides an $18 billion loan guarantee for the pipeline developers, offsetting

the risk of a potential drop in delivered natural gas prices and an associated loss of natural gas

revenues.43 The Energy Security Act of 1980 offered federal loan guarantees and price guarantees

to encourage investment in synthetic fuels and biomass energy infrastructure (which may not

have been economical based solely on the market price of produced energy).44 Although such

price risk policies are intended to promote increased investment in specific categories of energy

supply, similar price risk justifications could apply equally to end-use efficiency investments.

Clay Nesler, Vice President, Global Energy & Sustainability, Johnson Controls, Inc. as quoted in: “New Research

From Johnson Controls Indicates Energy Efficiency Is Still Important to Business Leaders, but Investment Lags,” PR

Newswire, May 6, 2009.

U.S. Representative Rick Boucher, Statement before the House Energy and Commerce Committee, Energy and Air

Quality Subcommittee, Legislative Hearing on Discussion Drafts concerning Energy Efficiency, Smart Electricity

Grid, Energy Policy Act of 2005 Title XVII Loan Guarantees, and Standby Loans for Coal-to-Liquids Projects, 110th

Cong., 1st sess., May 24, 2007; H.R. 2208 §(2)(2)(A)(ii).

P.L. 108-324, Div. C § 116.

P.L. 96-294 §§ 133, 134, 214, 215.

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One particular complication of energy price uncertainty for energy efficiency initiatives is its

implications for the level of government incentives offered to encourage building efficiency

investments. Be they tax breaks, cash rebates, low interest loans, or other financial mechanisms,

government incentives for building energy efficiency measures must be established based upon

assumptions about financial performance. If cost-effectiveness estimates are highly variable due

to energy price volatility, financial incentive programs may end up paying more than they need to,

or may not pay enough, to achieve a given energy savings outcome. Facing rapidly changing

energy prices, administrative delays or statutory time lags in establishing (or revising) the levels

of efficiency incentives may result in additional economic inefficiency.

Although global energy markets are not subject to direct control by U.S. agencies, some drivers

of electricity prices, specifically, may be more in Congress’s sphere of influence. For example,

the costs imposed by carbon control, corporate taxes, and other federal requirements are largely

established by Congress. In these cases, even where markets may also play a role (e.g., sulfur

dioxide allowance trading), Congress may establish rules and limits to provide greater cost

certainty and, in this way, reduce the investment risk premium associated with cost uncertainty. In

the context of building energy efficiency, there may be many policy options available to reduce

electricity price uncertainty, but there has been relatively little identification or consideration of

them in the policy community. Neither the American Clean Energy and Security Act of 2009

(H.R. 2454), now under consideration, nor any other current legislative proposals contain these

kinds of provisions.45 Accordingly, Congress may ultimately move to develop additional

information and perspective on the role of market risks on building efficiency investment and

their implications for achieving national building efficiency goals.

Utility Fiscal (Rate) Policy Issues

The Lock-in report identifies utility cost-recovery, revenue erosion, and the coupling of utility

profits to sales as key fiscal policy disincentives to building efficiency. Some stakeholders

maintain that, until utility profits are decoupled from the amount of electricity they sell (through

alternative rate structures), utilities will be, at best, only reluctant partners in government efforts

to reduce building electricity consumption.

Addressing utility rate issues has been a challenge for the federal government as retail rate design

for electric utilities historically has been under exclusive state or local authority. Nonetheless, as

Table 2 shows, starting with the Energy Policy Act of 1992 (P.L. 102-486), Congress has enacted

rate-related provisions intended to alleviate utility rate policy challenges.46 Among other

provisions, P.L. 102-486 required that state utility regulators consider setting the rates for electric

utilities so that outlays for energy conservation and energy efficiency resources, accounting for

lost revenues, would be at least as profitable as those for new energy supply infrastructure

(§111(a)(8)). These “revenue neutral” rate provisions targeted fiscal policy barriers to utility-run

efficiency programs like those cited in the Lock-in analysis. The Energy Policy Act of 2005 (P.L.

109-58) mandated a study of state policies promoting utility energy efficiency programs, taking

into consideration rate issues and other fiscal disincentives (§139). The resulting report, released

The American Clean Energy and Security Act of 2009 (H.R. 2454) was introduced on May 15, 2009 by

Representatives Henry A. Waxman and Edward J. Markey. The bill was reported by the House Energy and Commerce

Committee on May 21, 2009.

State utility commissions regulate the rates of investor-owned utilities. The rates of public power entities, such as

municipal utilities and rural electric cooperatives, are set by the entity governing board, such as a city council.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

by the Department of Energy in March 2007, recommended that state regulators consider a range

of policies to remove rate disincentives to utility-run end-use efficiency programs.47 The Energy

Independence and Security Act of 2007 (P.L. 110-140) expanded the provisions in P.L. 102-486

by mandating that state utility regulators consider “rate design modifications to promote energy

efficiency investments” (§532(a)).

Although Congress first enacted rate barrier provisions in P.L. 102-486, these and subsequent

statutes have had only a limited impact on current utility rate structures. Adoption of revenue

neutral rates and other rate policies under P.L. 102-486 and P.L. 110-140 has been voluntary—and

most state utility commissions have not embraced them. Some states that initially adopted these

policies in the 1990s have subsequently moved away from them due to perceived incompatibility

with utility deregulation (concurrently promoted by Congress) and rapidly evolving energy

markets.48 Opponents of new rate structures, in particular, have argued that they depart too much

from traditional regulation, they shift sales risks from utilities to customers, they are complicated

by other regulatory initiatives to promote end-use efficiency, or that they change rate designs for

all customers for the benefit of a few, among other reasons.49 It is beyond the scope of this report

to examine the merits of these arguments individually. Building efficiency advocates and federal

policymakers have offered a number of counterarguments.50 The key point is that state and local

regulators have limited the implementation of rate policy measures in P.L. 102-486 and other,

similar, rate initiatives. As of March 2009, for example, only 13 states had approved, or planned

to approve, either fully decoupled rates or decoupled rate pilots.51

The American Recovery and Reinvestment Act (P.L. 111-5) signed by President Obama on

February 17, 2009, includes new provisions to address utility rate policy issues. The act

authorizes additional state energy program grants only to states whose governors

seek to implement ... a general policy that ensures that utility financial incentives are aligned

with helping their customers use energy more efficiently and that provide timely cost

recovery and a timely earnings opportunity for utilities associated with cost-effective

measurable and verifiable efficiency savings, in a way that sustains or enhances utility

customers’ incentives to use energy more efficiently. (Div. A, Title III, § 410(a)(1))

While its language is broad, the potential impact of this provision is debatable, in part because it

appears to stop short of being mandatory. Furthermore, because state utility commissions are

largely independent of governor’s offices, they may not be legally bound to adopt a governor’s

regulatory policy.52 According to the accompanying House committee report, therefore, this

U.S. Department of Energy, State and Regional Policies that Promote Energy Efficiency Programs Carried Out by

Electric and Gas Utilities, March 2007, pp. iv-v.

Jonathan Lesser, “Déjà Vu All Over Again: The Grass Was Not Greener Under Utility Regulation,” Electricity

Journal, Vol. 20 No. 10, December 2007, p. 36.

David E. Dismukes, Louisiana State University, Regulatory Issues for Consumer Advocates in Rate Design,

Incentives & Energy Efficiency, Presentation at the National Association of State Utility Consumer Advocates

(NASUCA) Mid-Year Meeting, June 11, 2007, p. 6, http://www.enrg.lsu.edu/presentations/2007.

See, for example, Marty Kushler, Dan York and Patti Witte, Aligning Utility Interests with Energy Efficiency

Objectives: A Review of Recent Efforts at Decoupling and Performance Initiatives, American Council for an EnergyEfficient Economy, October 2006, http://www.aceee.org/pubs/u061.htm.

Edison Foundation, “Status of Revenue Decoupling for Electric Utilities by State: March 2009,” Washington, DC,

March 5, 2009, http://www.edisonfoundation.net/IEE/issueBriefs/Elec_Decoupling_Map0309.pdf.

U.S. Congress, House Committee on Energy and Commerce, Energy and Commerce Recovery and Reinvestment Act,

111th Cong., 2nd sess., January 26, 2009, 111-7, p. 78.

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provision is designed only to “nudge” states “toward adopting policies that would remove

disincentives that utilities have to invest in energy efficiency.”53 However, the language seems to

suggest that a state utility commission will have to, at least, consider changes in its ratemaking

practices to align utility incentives with end-use energy efficiency.54 Moreover, many

stakeholders interpret the provision as encompassing utility rate decoupling, among other rate

options, which may lead more states to consider (or reconsider) decoupling policies, specifically,

in the interest of securing federal stimulus funds.

Policy Considerations for Utility Rate Barriers

It remains to be seen to what extent P.L. 111-5 will ultimately result in more efficiency-oriented

rate structures among U.S. utilities, and, consequently, more efficient buildings among their

customers. Establishing new utility rates is typically a multi-year regulatory process, especially if

those rates involve a significant departure from traditional practice. Moreover, because

decoupling is controversial, some governors may choose to forgo federal energy grant funds and

not abide by the act’s utility rate measures. Legal challenges by opponents of alternatives rates,

especially decoupled rates, may also ensue. Even in states where decoupled rates are ultimately

adopted, their effects on building efficiency may vary. The National Association of Regulatory

Utility Commissioners (NARUC), which opposes federal decoupling policies, has stated,

“[w]hether decoupling will in itself result in increased efficiency is still the subject of debate.”55

Given the recent passage of the utility rates provisions in P.L. 111-5, and reviewing the history of

the earlier efficiency-oriented rate provisions in prior statutes, Congress may choose to see how

effective its latest policies turn out to be before considering additional actions on utility rates.

H.R. 2454 contains no utility rate decoupling provisions. Nonetheless, according to press reports,

some stakeholders are proposing mandatory rate decoupling statutes in the current session of

Congress, potentially tied to a new federal cap and trade program for CO2 emissions.56 Whether

such a policy would ultimately achieve greater building efficiency than that in P.L. 111-5 is

unclear, although a proposal of this type would suggest that at least some analysts believe

Congress’s most recent utility rate policy may not go far enough in reducing utility rate barriers.

In any case, because of the time required to consider, enact, and implement new utility rate

policies among the states, and the time required for utilities to implement additional efficiency

activities under those rates, utility rate policies will likely remain a significant obstacle to

building efficiency programs well into the next decade.

Discussion

To date, the impact of federal efficiency initiatives in terms of energy savings has been well

below its technical potential—but not for lack of attention from legislators. Congress has had an

interest in improving the energy efficiency of buildings in the United States for over three

Ibid.

Kenneth Rose, “Addendum to the EISA PURPA Standards Manual,” American Public Power Assoc., March 17,

2009, p. 4, http://www.appanet.org/files/PDFs/ARRAcorrectiontoPURPAandnote.pdf.

National Association of Regulatory Utility Commissioners, Decoupling For Electric & Gas Utilities: Frequently

Asked Questions (FAQ), 2007, p. 5.

“Energy, State Groups Fear ‘Decoupling’ Revival Push In House, Senate,” Energy Washington Week, April 29,

2009.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

decades. Recent concerns about the contribution of power plant fuel combustion to atmospheric

CO2, and therefore to global warming, have lent a new urgency to building efficiency

considerations.

Looking back on federal efficiency statutes in the context of the Lock-in report, it appears that

congressional policies since 1975 have been focused persistently on the critical barriers of

industry structure, imperfect information, and high first costs. Congress has a history of

addressing technical risk, too, by encouraging technology demonstration, although this issue

appears to have been a lower priority over the last few years—perhaps due to the imperative of

accelerating the implementation of well-demonstrated efficiency measures. In successive statutes,

Congress has attempted to “push the envelope” in these areas through ever tighter efficiency

standards, new financial incentives, and other measures. For these barriers, policy debates revolve

more around the aggressiveness of federal actions and the details of programs rather than whether

Congress should intervene.

Congress also has a history of addressing unfavorable fiscal policies among utilities. Until 2009,

this history could be characterized as a single significant, but largely ineffective, attempt to

advance efficiency-oriented utility rates under P.L. 102-486. Rate provisions in P.L. 111-5,

however, are another significant attempt to lower rate barriers, although it will be at least a few

years before Congress will be able to gauge whether this statute will be more successful than the

one passed in 1992. So, in this case as well, Congress has long recognized the significance of the

rate barrier to building efficiency. It seems simply to have been harder to develop and enact

consensus policies to address it. That utility rate reform has been complicated should come as no

surprise due to the regulatory primacy of the states on utility retail rate matters and the often

controversial economic implications of decoupled rates.57

Congressional treatment of market risks seems to differ from its treatment of the other critical

barriers. Market risks, especially energy price risks, seem to have received relatively little policy

attention from Congress to date. One might argue that first cost incentives, like efficient

equipment rebates, implicitly address energy price volatility by making up for the risk premium

that volatility imposes on the financing of efficiency investments. But Congress does not appear

to have incorporated this perspective in its statutory provisions, so even though market risks and

incentive levels could be linked in this way, important questions remain about the nature of this

linkage and its importance in end-user investment decisions. Given the importance commercial

building owners and operators seem to place on this issue, Congress may consider a more direct

examination of market risk issues in the context of building efficiency investment and the policy

options available in response. What these policy options may be is an open question, as few

analysts have devoted significant attention to the issue. Statutes promoting an Alaska natural gas

pipeline or synthetic fuel plants offer possible examples of energy market risk mitigation policies,

but there may be other, potentially more appropriate ones.

Some analysts suggest that policies establishing federal energy efficiency resource standards,

which would require utilities to achieve specified levels of energy efficiency in their service

territories, could be an effective means of promoting efficiency investments in the face of the

barriers discussed in this report. The Save American Energy Act (H.R. 889) and the American

Clean Energy and Security Act of 2009 (H.R. 2454 § 101) are prominent examples of such

See, for example: U.S. Representative Joe Barton, “American Recovery and Reinvestment Act of 2009 (H.R. 1),”

Floor debate, Congressional Record, vol. 155, part 16 (January 27, 2009), pp. H576-H577.,

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

legislation currently under debate. In setting efficiency performance targets for utilities, however,

such policies may not necessarily target specific efficiency barriers as identified in the Lock-in

report. Utilities bearing more responsibility for efficiency improvements among their customers

might, therefore, face the same barriers that the federal government does now, with no new

mechanisms to overcome them. The utilities could choose to seek new rate structures to promote

efficiency, but such actions would require the consent of state regulators, already required to

consider such rates as a condition of receiving federal energy grants under P.L. 111-5. So it is

unclear if, and how, federal energy efficiency resource standards would do more to overcome the

Lock-in barriers than existing congressional initiatives.

Implications for U.S. Carbon Goals

The discussion above offers some perspective, albeit only qualitative, on the implications of

congressional building efficiency policies for meeting U.S. carbon reduction targets. Carbon

control studies that project electricity efficiency savings on the order of 5% to 10% over a 20-year

time frame appear consistent with U.S. conservation program experience, and may be aided by

any future costs of CO2 emissions if they are reflected in electricity prices. Achieving efficiency

improvements substantially above these levels, however, will likely require aggressive and

effective policies to overcome all critical barriers to investment in building efficiency. Using the

“critical” barriers from the congressionally mandated Lock-in report as a guide, it appears that

significant policy gaps remain with respect to utility fiscal policies and market risks. To the extent

that these barriers continue to impede private investment in building efficiency measures, they

may reduce the likelihood of achieving federal targets for carbon control associated with

efficiency. Therefore, policymakers may benefit from a complete and integrated understanding of

the full set of barriers to building efficiency and the range of carbon outcomes they imply.

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Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

Appendix.

See Table A-1 on the following page.

Congressional Research Service

Table A-1.Building Efficiency Provisions in Key Federal Statutes

P.L. 94-163

P.L. 95-618

P.L. 95-619

P.L. 96-294

P.L. 100-12

P.L. 102-486

P.L. 109-58

P.L. 110-140

P.L. 110-343

P.L. 111-5

BARRIERS

(EPCA,

1975)

(Energy

Tax Act of

1978)

(NECPA,

1978)

(Energy

Security Act

of 1980)

(NAECA,

1987)

(EPAct 1992)

(EPAct 2005)

(EISA, 2007)

(EIEA, 2008)

(ARRA, 2009)

Industry

Structure

325, 330336, 339,

361-366,

381-382,

394, 400D

210-223, 252253, 301-312,

421-427, 501,

541-544, 547551, 621-623

Title V,

Subtitles B-D

1-11

101, 104, 122124, 127-128,

152, 154, 156,

161, 163, 166168,

102, 104, 105,

109, 111, 135,

136, 139, 141,

152-154, 506

301-325, 413,

421, 431-441,

481, 494, 503,

504, 522-528

410(a)(2-3)

Incomplete/

Imperfect

Information

321-324,

326-339,

391-393,

400A-400C

210-225, 301312, 541-544,

547-551

Title V,

Subtitles F, H

102, 121, 125126, 143, 157160, 163-165,

171-173, 1602

101, 103, 131134, 137, 138,

140, 1251,

1252, 1802,

1806, 1829

423, 1203

Div. A, Title

VIII

High (First)

Costs

395-400,

400E-400J

217, 225, 241251, 254, 301312, 545

Title V,

Subtitles A, E

105-106, 141142, 153, 155,

162,

105, 122, 124126, 128, 151,

1331-1335

411, 471, 493,

495, 511-518,

541-548,

1201, 1202,

1204-1206,

1306

103, 2101-2102,

2104-2105

107, 127, 140,

911-925,

1701-1704

422, 491-493,

495, 1203,

1301-1305,

1307

111, 113-114,

3015

139

532

Technical

Risks

Title I

521-524

Div. B

Div. A, Titles

III,IV, V,VII,

XII; 1121

Market Risks

Unfavorable

Fiscal

Policies

410(a)(1)

Notes: Provisions in italics apply to federal buildings only. Provisions authorizing general efficiency grants to state or tribal government agencies are not specifically directed

toward any barrier categories, so they are excluded from the table. The number of provisions in any specific box in the table should not be interpreted as a measure of

relative significance or anticipated policy impact.

CRS-20

Energy Efficiency in Buildings: Critical Barriers and Congressional Policy

Author Contact Information

(name redacted)

Specialist in Energy and Infrastructure Policy

[redacted]@crs.loc.gov, 7-....

(name redacted)

Senior Specialist in Science and Technology

[redacted]@crs.loc.gov, 7-....

(name redacted)

Specialist in Energy Policy

[redacted]@crs.loc.gov, 7-....

Congressional Research Service

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