Ohio's Energy Efficiency Fiasco

Ohio's Energy Efficiency Fiasco

Winter is here, and Americans are coping with more than just the cold -- many are dealing with a yearly spike in their energy bills. As rational consumers, they can be trusted to make efficient choices, and they benefit from doing so. Unfortunately, misguided policies often get in the way. Take, for example, Ohio's recent attempt to reduce energy use.

According to my research, a 2008 law drove utility bills in the state higher -- even as the law's energy-efficiency goals were in doubt. As of late last year, most energy-industry reports indicated that SB 221 was on track, but the evidence said otherwise. Accordingly, at the beginning of 2015, SB 221 was suspended for two years pending evaluation of its effects by an independent panel.

If it desires, the state will restore the law's efficiency requirements when the evaluation is finished. Before doing so, lawmakers should carefully note the key problems with the legislation as it was written and implemented.

Under SB 221, the Public Utilities Commission of Ohio (PUCO) must enforce an "Energy Efficiency Resource Standard" on Ohio's utility companies (municipal and cooperative systems are exempt). By 2022, utilities are required to facilitate a 22 percent reduction in energy use.

To accomplish this, they can spend up to 3 percent of their annual revenue on efficiency programs such as rebates on energy-efficient appliances, tune-ups of HVAC systems, or energy-efficient light-bulb subsidies, and then recover what they spend through customers' bills. To date, Ohio customers have paid more than $1 billion.

Aside from light-bulb subsidies (which cannot be tied to specific consumers and are addressed below), few of these programs are affecting very many consumers. In April 2013, for example, only 2 percent of FirstEnergy's business customers participated in its efficiency programs, leaving the remaining 98 percent to shoulder the costs. Only 7 percent of its residential users benefited from programs aimed at them.

Energy efficiency is important, and advocates of the law might argue that it's worth the billion-dollar public expense. They started with high hopes that innovative programs would benefit Ohio and the nation. But, expensive or not, the law doesn't appear to be working.

Utilities have complied largely by subsidizing retail sales of energy-efficient light bulbs. In 2012, lighting programs accounted for 83 percent of Dayton Power and Light's alleged energy savings, a lower percentage than some other utilities. Among the company's residential customers, lighting was 88 percent of the total.

Here's the catch: Most of those energy-efficient bulbs would have been purchased with or without SB 221. If you buy a subsidized bulb but would have paid full price, the industry calls you a "free-rider." Most other states account for free-riders in their measurement; Ohio does not. (A few years ago, PUCO, with the backing of utilities, ruled that free-riding is a form of saving, claiming that "gross" rather than "net" effects are what matters.) California calculates that about 70 percent of bulb buyers free-ride, and there is no reason to assume that Ohio is much different. It's clear that the great bulk of Ohio ratepayers' $1 billion has wound up in the pockets of free-riders.

If SB 221 is reinstated in its original form, these problems will become bigger, and quickly. PUCO rules require each utility to retain a consultant for its program. In 2013, most of their reports found the same thing: Opportunities for additional efficiency are rapidly diminishing. Dayton Power and Light's consultant reports that cost-effective programs are likely to run out before it achieves half of the law's required 2022 savings. The American Council for an Energy Efficient Economy acknowledges a need to devise new programs.

No one wants to break one of the biggest secrets in Ohio: Its energy-savings figures thus far are grossly in error, and opportunities to make up for it look scarce. The future belongs to the energy-efficient, but Ohio will never get there until its policymakers understand the difference between free-riding and true efficiency.

Robert Michaels, a professor of economics at California State University, Fullerton, is author of "Ohio's Energy Resource Standard: Where are the Real Savings?", a recent study published by the Mercatus Center at George Mason University.

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