CALIFORNIA’S BUILDING DECARBONIZATION OPPORTUNITY

Executive Summary

Transcendent Energy for the Building Decarbonization CoalitionALEJANDRA MEJIA CUNNINGHAM • MICHELLE VIGEN RALSTON • KATIE WU

ACKNOWLEDGEMENTS

This report was prepared for the

Building Decarbonization Coalition

(www.buildingdecarb.org). The

authors wish to thank the members

of the Coalition for their valuable

review of the draft report.

Building Decarbonization Coalition 3

California is committed to substantial greenhouse gas (GHG)

emission reductions by the middle of this century. AB 32 put the

state on the path to reduce emissions to 1990 levels by 2020, a

target which was later increased to emissions 40% below 1990

levels by 2030. SB 100 mandates that the state’s electricity de-

mand be served by carbon-free resources by 2045. Finally, Gov-

ernor Jerry Brown’s executive order pledges that the state will

achieve economy-wide carbon neutrality that same year. This

means that by 2045, the world’s fifth-largest economy will no

longer be associated with any GHG emissions. Meeting these

ambitious goals will create a robust, resilient economy that is

not dependent on fossil fuels, and will set an example for the

rest of our nation, and for the world.

The economy-wide carbon goals require that California decar-

bonize much of its building energy use. In 2016, buildings were

responsible for one-quarter of California’s GHG emissions.1 A

key strategy for accomplishing much of this necessary decar-

bonization at the lowest cost is beneficial building electrifica-

tion. This involves using clean electricity for many uses that

currently depend on fossil fuels. For example, converting space

and water heating to run on clean electricity by 2050 could

reduce building sector emissions by up to 27 million metric tons

of carbon dioxide equivalents (MMt of CO2E), depending on a

variety of factors, including continued technology innovation

and equipment performance.2 Other near-zero-emission tech-

nologies and fuels, such as renewable gas, may also become

viable and play a role in decarbonization in the coming decades.

Senate Bill 1477 tasked the California Public Utilities Commis-

sion (CPUC) with kick-starting the state’s initial building decar-

bonization efforts.3 The Building Decarbonization Coalition is

publishing this set of three white papers to help the CPUC bet-

ter understand the opportunities and challenges involved with

building decarbonization at the scale and speed necessary to

meet the state’s climate goals. The first paper discusses costs

and benefits of electrification, and how to structure a regula-

tory framework that supports the most effective investments in

building decarbonization. The second paper explores how to

design appropriate and fair energy rates that reward—not pun-

ish—efficient, grid-friendly, and resilient building electrification.

The third paper describes selected best practices to enable the

market transformation towards near-zero-emissions technolo-

gies at the pace and scale needed to achieve California’s emis-

sions goals.

CALIFORNIA’S BUILDING DECARBONIZATION OPPORTUNITY: KNOWING WHERE WE ARE AND DELIVERING WHAT WE NEED

Within the limits of technology available today, building electri-

fication is a key component of California’s least-cost pathway

to meeting its long-term climate commitments.4 California has

been reducing the carbon footprint of its electricity since 2006.

By 2016, 45% of electricity used in California came from ze-

ro-emission resources.5 Recent technological advances have led

to electric space and water heating technology that is many

times more efficient and effective than any other comparable

option. Combined, the high efficiency of electric equipment and

low GHG profile of California’s electricity make building electri-

fication an important least-cost strategy for meeting California’s

climate goals.6 Recent modeling performed for the California

Energy Commission found that a high-electrification decarbon-

ization strategy can be several billion dollars less expensive for

California than the next available carbon abatement strategy.7

Yet, significant barriers remain, including technology accessi-

bility, workforce readiness, retrofit costs, and regulatory tools

that are insufficient for valuing the benefits of building decar-

bonization.

A New Regulatory Framework for Building Decarbonization

The urgency of the climate goals and the magnitude of the

barriers to be overcome demand innovative and aggressive

approaches to market development. These approaches should

build and improve upon past successes with other technologies,

such as efficient lighting and distributed solar. However, Cali-

fornia also needs policies, strategies, and tactics that will get

results even faster than many of its past efforts. The California

Public Utility Commission’s (CPUC) regulatory framework will

set much of the state’s rules for this work. That framework can

either limit or expand the reach of building decarbonization.

California’s Building Decarbonization Opportunity

E X E C U T I V E S U M M A R Y

4 Building Decarbonization Coalition

Given the need for effective new approaches, the first paper

proposes a sample set of guiding principles that could help the

CPUC set the tone for building decarbonization in California:

focus on GHG reductions, flexibility to adapt to changing mar-

ket realities, rules that support customer-centric interventions,

and affordability so all customers can access clean energy. The

paper also discusses next steps that will ensure the guiding

principles are reflected throughout regulatory action and im-

plementation. The resulting framework will support a strategic

approach focused on delivering the least-cost GHG emissions

California needs and is nimble enough to support the contin-

uous improvement that will be necessary to meet the state’s

climate goals.

RATE DESIGN FOR BUILDING ELECTRIFICATION

Energy rates determine the operating costs of customers’ equip-

ment and appliances. The CPUC has authority over several as-

pects of energy rate design that can influence the customers’

cost of operating efficient electric equipment. By adjusting key

rate design levers, the CPUC can send optimal price signals to

help customers purchase and operate new electrification equip-

ment in ways that reduce costs for all Californians. The rate

design paper discusses the levers that are key for building elec-

trification and sets a short- and long-term vision for how rates

must evolve to support the state’s economy-wide decarboniza-

tion goals. Key rate design levers that will need to be considered

in the near-term are:

• Baseline allowances

• Optional TOU rates with larger peak to off-peak price

differentials

• Revisiting high usage charges for residential customers,

and non-coincident demand charges for other custom-

ers types

STRATEGIES AND APPROACHES FOR BUILDING DECARBONIZATION

To date, there exists an abundance of experience with accelerat-

ing the adoption of new building equipment and systems. The

question is how to deploy and improve upon these approaches

to effectively and quickly maximize decarbonization, and how

to best target each building sub-sector (i.e. single family new

constructions vs. existing multifamily buildings or public sector

properties).

As California embarks on this journey, markets must be properly

developed and supported. A wide range of market develop-

ment (or transformation) activities will bring technologies to the

forefront, increase familiarity, and lower costs and other adop-

tion barriers. Engagement with equipment manufacturers and

distributors will be key at this stage. This is also the appropriate

time to jumpstart necessary workforce development and train-

ing, and consumer education. A second phase could harness

any progress in market development, emerging workforce, and

interested customer base by engaging with building manage-

ment professionals and providing demand-lifting incentive pro-

grams to customers, financing, and local government support.

The third paper summarizes approaches and best practices to

support market development, and activate customers that Cali-

fornia can further develop, tailor, and re-orient to help meet the

aggressive and achievable goal of greenhouse gas emission re-

ductions in its built environment. These initial best practices are

mostly focused on interventions within the scope of the CPUC,

with the purpose of informing initial SB 1477 implementation.

A follow-up publication later this year will build on these find-

ings and make specific recommendations tailored for California.

These forthcoming recommendations will also consider the role

of other entities in ensuring successful decarbonization of build-

ings across the state.

NEXT STEPS

The implementation of SB 1477 offers the CPUC an opportu-

nity to pilot and learn from the new approaches necessitated

by California’s building electrification needs. The initial imple-

mentation conversations should focus on rate design, market

development, workforce readiness, and reaching underserved

customers, all with an eye towards broad scale and accelerated

market engagement. This initial set of issues satisfies legislative

requirements and addresses some of the most urgent barriers

identified throughout these three papers. Findings from this ini-

tial roll-out should inform future investments: failures should

be used as learning opportunities, not hinder forward prog-

ress, and successful strategies should be expanded. As strategic

building decarbonization progresses, technology and installa-

tion costs will fall and the equipment will become increasingly

accessible. The CPUC and others will need to prepare for this

opportunity by developing retrofit programs, financing, and

other enabling tactics.

Building Decarbonization Coalition 5

Endnotes1. California Air Resources Board, 2018, California Greenhouse Gas Emissions Inventory - 2018 Edition. This figure includes

electricity use. Figures cited elsewhere in these papers focus solely on emissions from fuels burnt directly in buildings.

2. Energy and Environmental Economics (E3), Deep Decarbonization in a High Renewables Future, Prepared for the California Energy Commission, June 2018, Appendix A.

3. SB 1477 (Stern) also requires collaboration with the California Energy Commission (CEC). However, these papers focus on the role of the CPUC. Forthcoming Building Decarbonization Coalition work will consider the role of the CEC as well as several other entities in the state.

4. Ibid, Figure 27.

5. California Energy Commission, California Energy Almanac, http://www.energy.ca.gov/almanac/electricity_data/total_system_power.html.

6. Current heat pump equipment efficiencies make up for the electric energy lost in transmission and distribution. Therefore, in California, heat pump space and water heating equipment emit fewer GHG emissions than any other available technology. See A Path Forward for the Three Prong Test: Recommended Updates to the CPUC’s Test for Fuel Substitution, Transcendent Energy, filed by the Natural Resources Defense Council in R.13-11-005, July 27, 2018.

7. E3, Figure 27.