Energy Efficiency Standards
The Clean and Renewable Energy and Energy Waste Reduction Act (PA 295 of 2008) created a mandatory energy efficiency portfolio standard (known as the Energy Optimization Standard) for Michigan's electric and natural gas utilities-- IOUs, municipal and co-op utilities. PA 342 (2016) built upon the PA 295 framework and changed the Energy Optimization program label to Energy Waste Reduction (EWR) programs.
The original 2008 standard set annual electric and natural gas savings targets for utilities. Utilities began their programs in 2009, and ramped up to reach a goal of 1.0% of electricity and 0.75% of natural gas by 2012. With the passage of PA 342, the annual electric savings requirement of 1% was extended through 2021 and the annual natural gas savings requirement remained intact. The 2% spending cap in place for natural gas and electric utilities was also eliminated.
These savings levels were further updated with PA 229, which passed in 2023. This legislation increased the energy savings requirements to 1.5% for electric utilities and .875% for gas utilities, starting in 2026. Portfolios also need to have an average life of at least eight years for energy waste reduction measures on the electric side, and 10 years for the gas side.
Utilities that do not wish to run their own energy efficiency programs can make an Alternate Compliance Payment to a third-party administrator approved by the commission. Several smaller utilities routinely choose this path.
Additionally, PA 229 maintained the large user exemption if those users demonstrate energy reductions under self-direct programs. The legislation also institutes minimum spending requirements for low-income energy waste reduction: 25% on the electric side and 35% on the gas side.
Resource Planning
Michigan has two distinct integrated resource planning (IRP) processes.
The first is triggered when utilities seek a Certificate of Necessity (CON) for a new power plant, transmission project or major power purchase contract. When pursuing a CON, the utility must show that they have established the need for that capacity through an approved integrated resource plan. The criteria for a CON apply to utilities developing projects over $100 million in size. The MPSC is authorized to establish CON IRP standards, including projected energy efficiency and demand response savings.
Under the second IRP process, utilities must submit periodic IRPs to the MPSC according to various criteria, with 5-, 10- and 15-year load forecasts. The MPSC is required to provide the utilities with baseline modeling assumptions and scenarios to be used for future IRP filings. In their IRPs, utilities are required to demonstrate plans meet energy waste reduction requirements, to evaluate all supply-side and demand-side resources and to estimate the various rate impacts.
- Statute: MCL § 460.6s (1939 PA 3)
- Statute: MCL § 460.6t (1939 PA 3)
Rate Structures & Incentives
Cost-Recovery
Utilities that provide energy efficiency can recover the cost of implementing approved plans. Costs that exceed those specified in the approved plan are not recoverable, unless they are prudently made and meet cost-effectiveness testing. Costs are recovered by a volumetric charge for residential customers and natural gas customers, and a per-meter charge for all other customers. A utility can also seek to capitalize program costs for its Energy Waste Reduction programs, unless it made an alternate compliance payment.
Lost Revenue Recovery and Revenue Decoupling
Natural gas utilities can request a symmetrical revenue decoupling mechanism for the recovery of lost revenues, as long as they are spending at least 0.5% of total revenues on energy efficiency programs.
Previously, pilot decoupling mechanisms were approved on a case-by-case basis for both natural gas and electric utilities in Michigan. The Michigan Court of Appeals struck down the electric decoupling pilots in 2012 after a determination that the MPSC lacked the legislative authority to approve them.
However, effective April 20, 2017, electric utilities with less than 200,000 customers in the state can request a revenue decoupling mechanism that adjusts for decreases in actual sales compared to the projected levels used in that utility’s most recent rate case that are the result of implemented energy waste reduction, conservation, demand-side programs, and other waste reduction measures if the utility first demonstrates statutory criteria.
Utility Incentives
PA 229 amended the incentive structure in place for Michigan utilities. For electric utilities, the law sets up five tiers where utilities can claim the lesser of either a percentage of customer life cycle cost reductions or the utility's yearly energy waste reduction program spending. The tiers start at 1.5% annual savings and increase by approximately .17%, with the top tier at 2.17% savings.
There are three tiers for natural gas utilities, with incentives starting when a utility saves .875% of sales, with the top tier at 1.25%. Gas utilities can also receive an additional incentive if they spend at least 67% of their total energy waste reduction budget on 'measures that reduce space heating loads.'
Noncompliance Penalties
Michigan’s standard does not specify penalties for noncompliance, though it does specify that after its September 2015 compliance report, the commission can suspend programs of a utility that does not meet cost-effectiveness requirements and require it to maintain current energy efficiency levels without new cost-recovery.
The Attorney General or a member of a cooperative utility can bring civil action against a utility for non-compliance with the Energy Waste Reduction Standard.
Stakeholder Collaboration
The Michigan Energy Waste Reduction Collaborative was established by the Commission orders approving the initial EWR Plans for Consumers Energy and DTE. The collaborative, facilitated by PSC staff, includes all the utilities that are subject to PA 295, as well as energy efficiency experts, program implementers and other interested stakeholders. Its duties include recommending improvements to EWR plans, providing program evaluation support, developing or re-designing energy efficiency programs, updating the Michigan Energy Measures Database and promoting economic development and job creation through energy efficiency. With the passage of PA 229, the collaborative was renamed the Energy Optimization Collaborative.
Program Evaluation
Cost-effectiveness Testing
The portfolio must pass the Utility System Resource Cost Test (USRCT; better known as the Program Administrator Cost Test), though individual programs need not pass that test. EWR Plan filings should include USRCT, Total Resource Cost Test (TRC), Rate Impact Measure Test (RIM) and Participant Cost Tests (PCT).
Net vs. Gross
The Energy Optimization Plan guidelines specify that evaluation plans must include the verification of annual incremental gross energy savings.
Technical Resource Manual
The Energy Waste Reduction Collaborative developed the Michigan Energy Measures Database (MEMD), which serves as the technical resource manual for energy program development and evaluation in the state of Michigan.
State Energy Plan or Vision
The Michigan Department of Environment, Great Lakes and Energy released the state's MI Healthy Climate Plan in April 2022, as directed by Governor Whitmer's Executive Directive 2020-10. EGLE worked in conjunction with the Council on Climate Solutions to create a roadmap that would help Michigan commit to environmental justice and pursue a just transition, clean the electric grid, electrify vehicles and increase public transit, repair and decarbonize homes and businesses, drive clean innovation in industry and protect Michigan's land and water.
Energy efficiency is highlighted throughout the Plan, including strategies like adopting the newest building energy codes, achieving at least 2% annual energy efficiency savings for electric utilities and 1.5% for natural gas utilities, restoring the energy waste reduction standard for munis and coops and expanding energy efficiency financing options. Many of these goals were incorporated into the 2023 energy waste reduction legislation.