Energy Efficiency Standards

Summary

Note: In February 2024, the Arizona Corporation Commission (ACC) voted to direct ACC Staff to draft rules to repeal the energy efficiency requirements described here. The ACC is considering this matter in Docket No. RE-00000A-24-0025. As of September 2024, the rules have not been finalized the the energy efficiency requirements are still in effect, though the final compliance year has already passed.  

Origin

The Arizona Corporation Commission (ACC) adopted rules in August 2010 and December 2010 requiring certain electric and gas utilities in the state to meet prescribed energy efficiency requirements by 2020. In addition, in 2011, the elected Board of the Salt River Project (SRP), a publicly-owned utility in Greater Phoenix, established Sustainable Portfolio Principles that also set targets for energy efficiency by 2020.

Electric Sales Reduction

The Arizona Corporation Commission (ACC) adopted rules in August 2010 requiring certain electric utilities in the state to meet prescribed energy efficiency requirements. The rules pertain to public service companies providing retail electric service and having annual revenue of more than $5 million; however, electric distribution cooperatives have to propose a goal for each year to achieve at least 75% of the savings requirement. SRP has also adopted its own electric energy reduction goals as a part of its Sustainable Portfolio Principles, as noted above.

By 2020 every investor-owned utility must achieve cumulative savings equal to 22% of its previous year’s retail electric sales. For example, a utility with 2019 sales of 100,000 kilowatt-hours (kWh) must achieve a total savings of 22,000 kWh by 2020. The first year for compliance is 2011, during which time utilities must save 1.25% of their 2010 electricity sales. The requirement ramps up over time according to the following schedule:

Utilities can meet their savings requirements through a variety of means:

• Demand-side management (DSM): Utilities can provide incentives for their customers to replace existing equipment or processes with more energy efficient options, and can count those savings towards their goal.
• Peak demand reductions: Utilities can count peak demand reductions resulting from demand response and load management programs toward their requirement. To quantify the kWh savings of a demand response program, utilities can assume a 50% annual load factor. The total amount of savings that can come from peak demand reductions is limited to 2 percentage points in 2020 (~9% of the requirement).
• "Pre-Rules" DSM: Savings achieved through DSM programs offered between 2004 and 2011 can be counted towards the requirement. The savings, limited to 4% of 2005 energy sales, will be allocated in years 2016 through 2020 as demonstrated in the ACC’s rules.
• Building codes: Utilities are permitted to count up to one third of the energy savings associated with energy efficient building codes. The energy savings must be quantified through a measurement and evaluation study conducted by the utility.
• Combined heat and power (CHP): CHP installations not used to comply with the renewable energy standard may be counted as energy savings.
• Self-direction: Utilities may count energy savings achieved by their customers through their own initiatives.

Electric investor-owned utilities with revenues in excess of $5 million annually must submit to the ACC on June 1 of every odd year an implementation plan describing how the utility will comply with the requirements of the rules, except that the first implementation plan for IOUs is due by January 31, 2011. Electric distribution cooperatives with revenues in excess of $5 million annually must submit to the ACC on June 1 of every odd year an implementation plan for each DSM program the utility will be administering in the next two calendar years. The implementation plan should have a goal of achieving 75% of the efficiency requirements imposed upon IOUs for that year.

Natural Gas Sales Reduction

The ACC also established energy efficiency requirements for all gas utilities through a decision rendered in December 2010. By 2020 every gas utility must achieve cumulative savings equal to 6% of their previous year’s retail sales. The first year for compliance is 2011, during which time utilities must save 1.25% of their 2010 electricity sales. The requirement ramps up over time according to the following schedule:

Utilities can meet their energy savings requirements through a variety of means:

• Demand-side management (DSM) and renewable energy technlogy (RET) incentive programs: At least 75% of the efficiency requirement for each year must come from DSM or RET incentive programs.
• "Pre-Rules" DSM: Savings achieved through DSM programs offered between 2004 and 2011 can be counted towards a portion of the requirement as demonstrated in the ACC’s rules. The amount of "Pre-Rules" DSM that can be used cannot exceed 1% of any utility's total 2005 gas sales (in therms).
• Building codes: Utilities are permitted to count up to one-third of the energy savings associated with energy efficient building codes. The energy savings must be quantified through a measurement and evaluation study conducted by the utility.
• Self-direction: Utilities may count energy savings achieved by their customers through their own initiatives.

Program Administrator Type

Arizona's electric and natural gas utilities administer their companies' electric and natural gas efficiency programs required for compliance.

Cost-Effectiveness and Program Evaluation

Arizona's utilities are required to engage in evaluation, measurement and verification of the impacts of energy efficiency and demand reduction programs at the measure, program and portfolio levels in order to determine the energy and demand reduction impacts associated with their programs.

To evaluate the cost effectiveness of its utilities' efficiency and demand reduction activities, Arizona utilizes the Societal Cost Test (SCT) (one of the five "California tests" from the California Standard Practice Manual) as its primary test for measuring the cost-effectiveness of energy efficiency programs. No additional tests are specified by law or regulation.

Utility Cost Recovery Provisions

Arizona's investor-owned electric utilities have their revenues partially decoupled from their sales, as they receive a performance incentive based on the amount of cost-effective energy savings their programs produce. Arizona Public Service is currently eligible for an incentive of $0.0125 per kWh of energy its programs avoid, up to a pre-specified cap on the total incentive amount. Tucson Electric Power is also eligible for an incentive up to $0.0125 per kWh, but its incentive is calculated using a "shared savings" approach, where the utility can receive 8% of the net benefits of its programs.

One investor-owned utility (Southwest Gas) has its revenues fully decoupled from its sales.