Energy Optimization Standard

October 11, 2024

Summary

Public Act 229 of 2023, known as the Clean and Renewable Energy and Energy Waste Reduction Act, amends Michigan’s 2008 energy law, Act 295. This new legislation sets revised Energy Waste Reduction targets for electric and natural gas providers and requires the filing of Energy Optimization Plans. These plans must include strategies for Energy Waste Reduction and may also include optional measures for Efficient Electrification. 

Under the Act, electric utilities are required to achieve annual energy savings of 1.5% of their total retail sales from the previous year, while natural gas utilities must achieve annual savings of 0.875%.

History

In October 2008, Michigan enacted the Clean, Renewable, and Efficient Energy Act, Public Act 295, requiring the state's investor-owned utilities, alternative retail suppliers, electric cooperatives and municipal electric utilities to generate 10% of their retail electricity sales from renewable energy resources by 2015. This is known as the Renewable Energy Standard (RES).  In addition, the standard requires both electric and natural gas utilities meet certain energy savings requirements, known as the Energy Optimization Standard (EOS). 

For both the electric and gas requirements, the Michigan Public Service Commission (MPSC) must submit an annual report to the legislature, describing the MPSC's efforts to implement energy conservation and energy efficiency programs and measures. The most recent reports were published in November 2014 and September 2015.

Electric Sales Reduction

The EOS for electric sales requires an incremental reduction of 1.0% of previous year's retail sales in 2012, and for each year thereafter.

Calendar Year	Incremental Energy Savings
2008-2009	0.3%
2010	0.5%
2011	0.75%
2012 and each year after	1.0%

The MPSC established an energy savings requirement of incremental annual retail electricity or natural gas sales reduction. Energy savings requirements for each period are calculated by one of the following options: the number of weather-normalized MWhs, decatherms, or MCFs sold by the utility to retail customers in the state during the year for which incremental energy savings are being calculated; or the average number of MWhs, decatherms, or MCFs sold by the utility during the 3 years preceding the year for which incremental energy savings are being calculated.

In order to meet the EOS, utilities must offer energy efficiency programs for their customers. Each utility must file a proposed Energy Optimization Plan (EOP) with the MPSC. Each utility EOP must:

• Propose programs tailored to each customer class, including low income residential
• Specify funding levels
• Describe how the program costs will be recovered
• Ensure that charges collected from each customer rate class are spent on programs for that customer class
• Demonstrate that programs will be cost-effective (excluding low income programs)
• Provide for practical and effective administration of each program
• Include a process for an independent evaluation and verification of the EOPs

Natural Gas Sales Reduction

The EOS for natural gas sales requires an incremental reduction of 0.75% of previous year's retail sales in 2012, and for each year thereafter. The measurement for compliance is a reduction percentage of the previous year's total amount of natural gas delivered to retail customers.

Calendar Year	Incremental Energy Savings
2008-2009	0.1%
2010	0.25%
2011	0.5%
2012 and Thereafter	0.75%

The cost of implementing approved energy optimization plans is recovered from natural gas customers by volumetric charges.

Program Administrator Type

The utilities required to meet these standards administer the programs required to meet the EOS. 

Cost Effectiveness and Program Evaluation

While Michigan uses all five of the "California tests" of utility program cost effectiveness from the California Standard Practice Manual to evaluate EOS programs, it uses the Utility Cost Test (UCT) as its primary test.

Utility Cost Recovery Provisions

The cost of implementing an approved energy optimization plan is recovered from volumetric charges on all natural gas customers and residential electric customers, per-meter charges on all other metered electric customers, and itemized charges on unmetered electric customers.

For utilities that exceed the standards set forth, the MPSC may authorize additional financial incentives for the utility. Any incentive must be limited to the lessor of 25% of the net cost of reductions experienced by the utility's customers as a result of the implemented EOP, or 15% of the utility's actual expenditures for the program for the year.

Special Provisions

Commercial and industrial electric customers may opt out of the surcharge and implement a self-directed energy optimization plan. In order to participate in this program, the customer must meet certain annual peak demand requirements. Forms and filing instructions are available on the MPSC website. Self-directed customers may not opt out of surcharges required for low income programs. 

Utilities create Energy Optimization Credits (EOCs) for each megawatt-hour (MWh) of annual incremental energy savings achieved through its EOP. EOCs expire when they are used to comply with Energy Optimization Standard or RES. EOCs may be carried over for one year, but credits from the previous year may not exceed one-third of that year's standard.

Utilities may also substitute Renewable Energy Credits (RECs), Advanced Cleaner Energy Credits (ACECs), or load management in order to meet the efficiency requirements. RECs must be associated with renewable energy generated that year from a system constructed after October 6, 2008. One REC is equal to one EOC. ACECs include gasification, coal-fired facilities with carbon dioxide capture and sequestration, and electric generation facilities that use technologies not in operation as of October 6, 2008. ACECs must be in-state or located in the service territory of the utility. ACECs from plasma arc gasification are equal to one EOC, and 4 ACECs from non-plasma arc gasification technologies is equal to one EOC. RECs, ACECs, and load management implementations must be approved my the commission and may not account for more than 10% of the energy efficiency standard.