How an innovative nonprofit, Efficiency Vermont, the nation's first statewide provider of energy efficiency services, is helping businesses and households save money, reduce energy use, and protect the environment.

John Trattner

Vermont has a lot of barns, among them a particular 140-year-old structure in Fairfax, in the state's northwest, that houses about 90 dairy cows. Back in the 1990s, its interior was lit by several 100-watt bulbs and there also was a hot water heater. Together, these ran a monthly electric power bill of $900. But the barn's owners felt they were milking their cows by candlelight, especially in winter.

So they improved the lighting system. Today the barn has plenty of electric light but the power bill has dropped an average of $135 a month.

In Orleans, just south of the Canadian border, a nationally known furniture-making company was planning to close a 500-employee plant partly because of the high cost of electric power. Then it installed new technology focused on upgrading the plant's ventilation system. The system collects and removes huge amounts of dust produced by operations that saw, plane, and sand the wood for the company's renowned chairs and tables. These big ventilators don't have to run at top volume constantly because not all the dust-generating machines are in use at any one time. Yet that's what was happening, along with very high power costs, until the new equipment came along.

Today, that equipment monitors operations, detecting which machines are running when, and adjusting the ventilation system appropriately. This is expected to save the company a million dollars in power costs over 10 years. In addition, the new technology maintains a cleaner work place, cuts wear and tear, and keeps noise down. The company also is more competitive.

Efficiency Vermont

How and why were these savings in energy and costs possible? In both cases, and scores of others, the answer is Efficiency Vermont, the nation's first statewide provider of energy efficiency services. Created by the Vermont Legislature and the Vermont Public Service Board, Efficiency Vermont is operated by the independent nonprofit Vermont Energy Investment Corporation. Efficiency Vermont's mission is to help Vermont businesses and households save money, reduce energy use, and protect the environment. Funding for this effort comes from an energy efficiency charge on electric bills. Collected by the state's electric utilities, the charge goes into a fund operated by the Public Service Board. The fund doesn't belong to the state; it is ratepayers' money. At the end of 2002, the lifetime economic value of the energy efficiency investments made since 2000 was $66 million, compared to the total energy efficiency charge of almost $30 million for the three years.

Created in 1999, Efficiency Vermont began work the following year, encouraging and overseeing the installation of energy saving equipment and systems, like efficient lighting, facilities, and processes, in Vermont businesses, factories, dairy farms, and homes. Part of its formula is to offer financial incentives to persuade customers to make their own investments for improvement. That was the case with the furniture making plant in Orleans, where Efficiency Vermont put up $116,000 to induce the company to spend $280,000 for the ventilation monitoring technology.

In its first three years, Efficiency Vermont served 67,000 customers in all parts of the state, saving more than 98,000 megawatt hours of electric power statewide. In the same period, its operations also conserved other resources: 50 million gallons of water, 112,000 gallons of propane, 29 million cubic feet of natural gas, and 129,000 gallons of oil.

Environmental Gains

Significant gains for the environment also are involved. Over their average 14-year life span, efficient equipment and building approaches installed in the 2000-2002 period will reduce emissions of carbon dioxide by 1 million tons; nitrogen oxide by 1,300 tons; sulfur dioxide by 4,400 tons; and particulates by 350 tons. According to Efficiency Vermont, this is the equivalent of taking 14,000 cars off the road for a year.

By early 2003, three years into its operation, Efficiency Vermont had achieved more than 98,000 megawatt hours of saved electric power for 67,000 customers. That worked out to an energy efficiency cost of 3 cents per kilowatt hour for electric ratepayers. By then, the impact of the savings in power costs had become tangible for many kinds of energy customers. Among them was the library in Tunbridge, which reduced its electric bill by an annual $900, or a manufacturer of industrial scales that is saving $50,000 annually after completing a lighting upgrade project.

For power customers, the energy efficiency charge averages 1.5 percent of an electric bill-about the same amount that, before Efficiency Vermont, they were paying their individual utility companies for energy efficiency programs. Customers, therefore, are not encountering any appreciable in-crease in rates for power. And they are using less of it, thanks to the efficiencies that Efficiency Vermont is providing.

Innovation

To understand that, and to grasp the innovative dimension of these achievements, a bit of background is in order. Many companies that sell electric power also offer energy efficiency programs that help their customers use less power. Beginning in the early 1990s, Vermont's 22 power utilities were required to deliver energy efficiency services. A baffling hodgepodge emerged as companies delivered their own efficiency programs or did so in partnership with other utilities. At the same time, rising competition was forcing them to focus more on sales and less on efficiency. From a bottom-line perspective, they thus had less incentive to reduce sales through efficiencies.

State regulators tried to eliminate this disincentive, but their efforts raised costs and weren't entirely effective. Significant additional regulatory cost resulted from the task of overseeing the many separate efficiency programs to keep them in compliance with state law, a task that often involved lengthy litigation to correct deficiencies. Staying in compliance also cost the utilities to acquire the necessary expertise and resources. The programs' fragmentation produced other problems as well. They were not efficient administratively and administrative costs, passed on to customers, rose. Their diversity confused customers and created inequalities in service. In addition, performance standards exist and utilities' investment efficiency programs was declining.

Those various costs and impediments are now history. As Efficiency Vermont itself puts it, "Gone are the days of lengthy contested proceedings with electric utilities over efficiency program delivery; gone are the days of customer confusion over available services; and gone are the days of dueling electric utility incentives"-the basic conflict between trying to earn a profit while assisting your customers to consume less of what you produce.

Innovations in American Government Award

Its achievements carried Efficiency Vermont into the 2003 winners' circle for the prestigious Innovations in American Government Award-a program of the Ash Institute for Democratic Governance and Innovation at Harvard's Kennedy School of Government, in partnership with the Council for Excellence in Government. From hundreds of entrants each year, the award honors about five government programs with cash prizes of $1 00,000, intended to support activities that promote and spread the example of the winners' innovative accomplishments. By recognizing programs at all levels of government that respond with imaginative, viable answers to provocative social and economic challenges in American society, the innovations award emphasizes the important role of creativity and excellence.

When it created its energy efficiency utility in 1999, Vermont became the first state in the nation where the electric efficiency program is run by a single independent organization. Funding is provided by the state's electric ratepayers through a charge which appears as a separate line item on ratepayers' electric bills. Efficiency Vermont was created because a diverse set of stakeholders agreed that this new way of providing the energy efficiency mandated by state law would serve public interest. To move to the new model, the state's Public Service Board looked at six competitive bidders and chose the nonprofit Vermont Energy Investment Corporation, a designer and implementer of energy efficiency programs in Vermont, twenty other states, and eight other countries. The innovative contract that it signed with the Vermont Public Service Board, calling for the creation of Efficiency Vermont, represents a partnership across the public, private, and nonprofit sectors.

Performance-based Contract

The innovation doesn't stop there, however. The contract is performance-based, with a third of the contractor's fees held back and linked to verifiable performance. Three kinds of indicators measure that performance: program results, activity milestones, and total resource benefits. Efficiency Vermont's successful implementation of its first contract was rewarded with a contract renewal in 2003. There are other ways of viewing Efficiency Vermont's achievements. In the period 2000-2002:

• Total resource benefits (TRB) topped $66 million. TRBs are defined as the current value, in year 2000 dollars, of net savings of electricity, fossil fuel, and water.
• The $66 million figure compared with $24 mil-lion in the total cost of Efficiency Vermont services. Vermont got almost three dollars in benefits for every dollar it spent on Efficiency Vermont.
• Over the 14-year average lifetime of efficiency measures, Efficiency Vermont customers will save the state 1.4 million megawatt hours of electricity.

In short, Efficiency Vermont supplies program and administrative efficiencies, harvests energy and total resource benefits in the most cost-effective way, cuts down contentious regulatory argument over efficiency services, ensures statewide equality of services and benefits, boosts environ-mental protection, and eliminates the conflict between selling energy and reducing revenues and profits.

Road Blocks

Efficiency Vermont's path to these accomplishments was not free of road blocks. Early on, some of Vermont's 22 electric utilities were hesitant when the decision was made to transfer energy efficiency responsibility to a separate new entity. There were several reasons. Companies kept their customer information in different kinds of data bases, for example, and merging these varying formats into a single data base proved to be very difficult. Further, it was clear that privacy issues would require the development of confidentiality protocols.

These problems yielded, first, to Efficiency Vermont's significant early investment in data transfer capability and, second, to the willingness of the utility managers to work closely with Efficiency Vermont and the Vermont Public Services Board's contract manager. One electric utility however, chose to continue to deliver its own energy efficiency services to its customers. Efficiency Vermont and this utility work both independently and cooperatively to assure coverage of services in this utility's territory.

The program also faced the potential problem of reaching policy objectives with conflicting goals. For instance, Efficiency Vermont is mandated to obtain maximum electricity savings for consumers. This could be read as an invitation to supply efficiency services to big customers to the disadvantage of small customers, or to favor urban over rural customers. Such possibilities underscore the importance of setting priorities for policy objectives, something that is accomplished by the performance-based feature of the contract. This policy guidance takes the form of contractual objectives which, in the ex-ample cited, specify targets or benchmarks for services along a broad range of geographic and economic groups. As a result, Efficiency Vermont delivered its services equitably, serving a diverse range of businesses of all sizes and house-holds of all income levels throughout the state.

Competing policy goals also are apparent in the tension between having to achieve maximum power savings within the contract period and the equally important objective of developing strong longer-term markets for energy efficiency services and products. This could produce reluctance to spend money on projects that are not completed within the term of the project. To counter this, the contract contains a performance indicator for projects committed to and in the pipeline at the end of the contract. Efficiency Vermont is meeting these competing objectives successfully.

Pioneering State

All states recognize the advantages of energy efficiency programs and have developed a variety of regulatory and other regimes to provide them. None is as effective, how-ever, as that in Vermont-the first independent body with the sole mission to supply statewide energy efficiency, sup-ported by a discrete charge on electric power bills and operating under a performance-based contract.

This pioneering innovation has shown itself to be workable and productive beyond projections. The methods it used to resolve barriers that challenged it at the outset, and its contractual solutions to potential longer-term problems, also offer a bench-mark that can spare others similar time, trouble, and uncertainty. As such, Efficiency Vermont is a proven model for widespread adoption, in states with restructured and un-restructured electric retail markets alike. Along these lines, a former assistant secretary of the US Department of Energy recently commended the Vermont model to other states. He estimated that an Efficiency Vermont-type entity operating in all states would save the country40 percent in power savings for residential customers, 15to 30 percent for businesses, and 2 to 40 per-cent for industry. While efficiency programs in states like California, New York, and Wisconsin are effective in saving electricity, he added, all can do much better by taking utilities out of the energy conservation business.

Potential for Replication

This replicability of the Efficiency Vermont approach goes beyond the United States to other countries in varying stages of economic development, where establishment of such programs would help them provide cost-effective energy efficiency services and protect the environment.

Efficiency Vermont has saved the people of Vermont 98 million kilowatt hours of electric power through 2002. That's worth $66 million in the current value of net savings. Individual energy consumption and electricity bills will continue to drop for customers who use Efficiency Vermont's services, assuming similar electric use. But all power consumers, whether using Efficiency Vermont's services or not, will benefit; the reduction in demand for power and in the bur-den on the grid mean that the need for improvements in the grid and investments in new power sources, paid for by ratepayers, can be reduced or postponed.

Beyond this, says one expert, the success of the Efficiency Vermont experiment will spur further innovative technology and changes in energy markets. That will generate even more savings of energy for Vermont's future consumers.

John Trattner is a vice president of the Council for Excellence in Government, a partner in the Innovations in American Government Awards with the Ash Institute fir Democratic Governance at Harvard's Kennedy School of Government. For more information visit: http://www.excelgov.org/.