New Concept for Local Governments to Partner with Utilities and Participate in the Cap-and-Trade Market

The Cap-and-Trade market has added a new dynamic to California’s greenhouse gas regulations. Utilities are faced with finding cost-effective ways to comply with their emissions reductions requirements. Energy efficiency at the local government level presents a large opportunity for saving energy that is currently not incentivized by the Cap-and-Trade system.

The coalescence of these three related factors presents an interesting nexus for solutions. The emissions reductions resulting from saved energy can be valued against the cost of compliance to utilities, which is projected to increase over time.

In response to this nexus of opportunity, the Alliance has released Exploring Utility and Local Government Partnerships to Fund Energy Efficiency Projects for Compliance with AB 32, a whitepaper that outlines a new concept that would enable local governments to participate in the Cap-and-Trade market. Under the presented framework, local governments could partner with their load-serving utilities to move cost-effective energy efficiency projects forward. The concept presented follows this basic framework:

  • Local governments receive upfront capital from their load-serving utility.
  • These local governments undertake projects with measureable energy savings.
  • These energy savings result in reduced greenhouse gas emissions for the utility, helping them meet their compliance obligation under AB 32.

This possible fit between the utilities’ needs for compliance and local government opportunities for energy efficiency needs to be explored for cost-effectiveness. Local governments require additional funding mechanisms for expansive energy efficiency projects. Utilities are some of the largest entities covered under Cap-and-Trade regulations, leading to large compliance obligations. Energy efficiency is also known to be the most cost-effective way to balance supply and demand for electricity. The key to this new concept is that the funding comes from the utility’s compliance budget. Therefore, it is in addition to existing energy efficiency incentive programming. There are challenges to the framework. Thus, the Alliance addresses each of them individually in the whitepaper. The paper also includes recommendations for implementing this new framework for harnessing potential greenhouse gas emissions reductions.

Key study conclusions include:

  • There is an anticipated shortfall of compliance instruments (allowances and offset credits) occurring as early as 2016.
  • Alternate cost-effective means of compliance will be needed, and this mechanism could greatly benefit both utilities and local governments.
  • Working locally to permanently reduce emissions is a win-win opportunity for local governments and utilities.
  • There is widespread support among key stakeholders and industry subject matter experts to test this concept.

The study also summarizes key stakeholder feedback gathered as a part of concept exploration. Download the full report for more details.