California's industrial energy efficiency (EE) programs are built around a complex and restrictive baseline framework, implemented by the California Public Utilities Commission through the Standard Practice Baseline, custom project review procedures, and extensive documentation requirements. In theory, the framework ensures incentives support only efficiency improvements that would not have occurred absent the program. In practice, it is increasingly misaligned with the realities of energy-intensive industrial and manufacturing facilities — which operate long-lived assets, face intense out-of-state competition, and may be actively weighing reduced operations, closure, or relocation. In that context, the baseline framework becomes both economically ineffective and administratively unmanageable, discouraging the very investments California's energy and environmental goals require.

This paper explains how the baseline process works today, identifies its structural and administrative problems, and proposes a simplified, performance-based alternative better suited to long-lived industrial assets. It focuses on industrial custom EE projects administered under CPUC-regulated utility portfolios (PG&E, SCE, SDG&E) — motors, boilers, furnaces, compressed air, pumping systems, and other process equipment where savings are not deemed and must be justified through baseline analysis.

How the baseline process works today

California's framework is anchored in the Standard Practice Baseline — the counterfactual against which savings are measured. CPUC Resolution E-4939 defines it as an estimate of the installation that would take place absent the program — as required by code or as expected standard practice — that still meets the customer's functional, technical, and economic needs. The CPUC Energy Efficiency Policy Manual makes the key interpretive move explicit: standard practice is not historical behavior but a hypothetical modern choice — "the typical equipment or commonly-used practice."

Two consequences follow directly. First, existing equipment is generally not the baseline, especially if it is decades old. Second, the baseline reflects what a new facility would be required to install today — not what the facility is actually operating.

For industrial facilities, most projects are treated as custom: savings must be demonstrated against a project-specific baseline. Where code governs, the minimum compliant option typically defines the baseline — PG&E's Resource Savings Rulebook requires that a Standard Practice baseline comply with all applicable codes and standards at project commencement. Where code doesn't fully determine performance, developers must document and justify an industry standard practice baseline under the CPUC's custom project review guidance. Either way, the baseline reflects new modern equipment — and only rewards investment beyond that high bar, even though replacing old legacy equipment with merely the industry standard may itself deliver substantial energy savings.

Problem one: the baseline often reflects a fictional decision

For facilities with long-lived assets — boilers, large motors, furnaces, kilns, complex process systems — the real counterfactual is rarely "replace with standard modern equipment." Facilities continue operating existing equipment and repair as required indefinitely, or defer replacement due to capital constraints. By assuming a hypothetical modern replacement, the framework materially misstates reality and undervalues projects that would deliver large absolute savings.

Problem two: closure and relocation risk are excluded

Energy-intensive facilities are highly trade-exposed to competitors in jurisdictions with lower energy costs, no carbon compliance, and lighter regulatory burdens. Many are actively weighing idling operations, shifting production out of state, or concentrating investment at lower-cost facilities. For them, the realistic alternatives to an efficiency project are "do nothing" or "exit" — yet the framework does not recognize facility closure as a legitimate counterfactual, even when it is the most economically plausible outcome. Closure risk also raises the hurdle rate for any upgrade, since new equipment risks becoming a stranded asset. The result: zero or token incentives for the most impactful potential projects, higher exit risk, and emissions leakage out of state.

Problem three: deep retrofits are undervalued

Because incentives pay only for savings above a modern standard-practice baseline, projects that modernize very old equipment may receive little or nothing despite large total savings. The program is structurally biased toward incremental improvements at already-modern facilities — and toward projects with easy baseline justification — rather than comprehensive modernization of legacy industrial sites with the greatest savings potential.

Problem four: the framework is unmanageably complex

Baseline determination can require industry-standard-practice evidence, market surveys, vendor quotes, and contested engineering judgment, backed by extensive documentation. Disputes over "standard practice" are common and resource-intensive; evaluation reports identify baseline specification and documentation as major sources of project variation and administrative burden. For facilities already under economic pressure, these transaction costs discourage participation — so incentives flow to facilities with administrative capacity rather than to those with the highest savings potential.

A simplified alternative: performance-based improvement from existing conditions

For sectors with demonstrated long-lived assets — industry and manufacturing — California should incentivize verified efficiency improvements relative to existing performance, provided the improvement exceeds a minimum threshold. The approach replaces hypothetical baselines with observable, measurable reality:

  • Eligibility — limited to sectors with long asset lives and documented deferral behavior; applicable to existing facilities and equipment.
  • Baseline — the measured or metered energy performance of the existing system, normalized for output and operating conditions.
  • Threshold — incentives paid only if the project achieves a meaningful minimum improvement (for example, 20 percent); minor or routine upgrades remain ineligible.
  • Measurement — savings verified through engineering analysis with measured inputs, or pre-/post-metering with normalization.
  • Funding restrictions — incentives limited to funds paid into the program by eligible facilities, so nothing is subsidized by other customers. Participants are essentially spending their own money — on major upgrades that improve efficiency and advance California's policy goals.

This framework aligns incentives with actual decision-making (upgrade versus do nothing or close), rewards deep retrofits and system-level optimization, reduces baseline disputes and administrative burden, encourages timely action rather than deferral, and better supports industrial retention and emissions reduction — while preserving ratepayer protections through improvement thresholds, verified performance, self-funded incentives, and sector-limited eligibility.

Conclusion

California's baseline framework is increasingly misaligned for industrial facilities with long-lived assets, incentives to defer capital investment, and global competition. Existing policy produces inaction, delayed investment, and facility loss. A performance-based improvement framework — limited to industries with long-lived assets and meaningful improvement thresholds — offers a practical path forward: simpler to administer, more reflective of real industrial decision-making, and better aligned with California's economic and climate objectives.

Editor's note: the framework proposed in this whitepaper was subsequently introduced in the Legislature as CLECA-sponsored AB 2182 (Irwin). Follow its progress on our legislation page.