CSEM Policy Conference Panel Discussion Utility Incentives and the Strategic Plan December 9, 2008 William C. Miller Manager, CEE Strategic Issues Pacific Gas and Electric Company

2 Utility Energy Efficiency Incentives Overview Designed to induce maximum effort by IOUs to –Achieve CPUC adopted KW, KWH, therm goals –Reward for providing net benefits = value to customers Two part mechanism –Achieved unit savings determine rate of earnings Share (9% or 12%) of net benefits, if minimum performance standards met, or No earnings for savings levels 65% to 85% of goal, or Penalties if savings fall below 65% –Level of earnings determined by net benefits Benefits: the value of CPUC measured savings Costs: all IOU costs plus a mix of rebate/customer costs

3 The California Long Term Energy Efficiency Strategic Plan (CLTEESP) part I The CPUC Plan envisions Maximum energy efficiency (EE) in California in 2009 and beyond All cost-effective, reliable, and feasible EE is implemented (often in a whole-buildings approach) Strategies, Programs and Institutions add a focus on providing long- term savings EE will greatly reduce GHG emissions The centerpiece is four Specific “Big Bold Strategies”: New construction will be zero net energy –Residential by 2020 –Commercial by 2030 The HVAC industry will be transformed and optimized for California’s climate All low-income customers will have meaningful opportunity to participate and be provided all cost-effective measures by 2020

4 The CLTEESP Part II The plan: Describes actions in all major sectors Includes actions by many entities: IOUs, POUs, state agencies, private firms, etc. Presents near- and medium-term actions leading to long term change The plan envisions starting processes to transform EE markets: Does not quantify savings (KWH, KW, therms) or costs The ZNE (and HVAC ?) Strategies are not currently technologically feasible at reasonable cost Will require ceaseless innovation, trial (and error)

5 Linking The Two: The IOU Proposal For The IOUs Must file their energy efficiency proposals on February 2, 2009, Don’t know how the CPUC will “score” CLTEESP activities in terms of savings, Expect developing savings measurement methods for CLTEESP activities will neither be quick, simple or straightforward, and Want to support the CLTEESP but without undo risk to shareholders. So They Proposed All costs (including CLTEESP costs) be included in computing portfolio cost-effectiveness (statutory requirement), and Costs of CLTEESP activities be excluded from incentive calculations for (in parallel to the absence of CPUC measurable savings). This approach allows suitable metrics could be in place for

6 Linking The Two: Metrics for Market Transformation Nothing on this page reflects the positions or opinions of PG&E – only Bill Miller Determining the correct metrics requires deep understanding of the important elements of supply and demand in each market. This will not be easy Examples: High performance windows in CA Manufactured housing in the Pacific NW Proposed definition: A market is transformed when its conditions of supply and demand will realize its remaining potential EE savings in an acceptable time frame without further intervention Focus on underlying characteristics: demand behavior, production cost, etc. Ensures savings are realized (or at least considered) Allows that market’s EE potential to be realized and removed from future goals Codes and Standards remove the least efficient products and may be the only way for most markets to be at least (partially) transformed.