California said it had approved the most aggressive energy efficiency plan among U.S. states on Thursday, earmarking $3.1 billion to retrofit homes and other programs that will cut power needs equivalent to three medium-sized power plants.

Conservation and efficiency have become national buzzwords as the economy has failed, since such investments have some of the quickest paybacks of any in 'green' industries.

The California Public Utilities Commission set a three-year budget for utilities 42 percent higher than the previous plan. The state pioneered the concept of letting utilities raise rates as they spurred conservation, which still is not the case in many U.S. states.

Edison International's unit Southern California Edison, PG&E Corp's main unit Pacific Gas and Electric Company, Sempra Energy's San Diego Gas & Electric Co and its Southern California Gas Company will funnel the money into a dozen statewide programs and some extra smaller initiatives.

The energy saved through the programs would be the same amount of power produced by three 500 megawatt power plants, according the California Public Utilities.

The programs will also avoid 3 million tons of greenhouse gas emissions and create between 15,000 and 18,000 jobs.

The move by regulators follows California Governor Arnold Schwarzenegger's order earlier this month that the state get a third of its electricity from renewable resources by 2020.

The most populous state is also the biggest U.S. alternative energy market, and its environmental standards, including car pollution rules and green building regulations, are models for national and international policies.

To reach California's goals, however, broader programs that have holistic approaches to energy efficiency are key, said Michael Peevey, the commission's president, in a statement.

Capturing the full energy efficiency potential in the state requires more than simply providing rebates to support the installation of the latest and greatest widget, Peevey said.

The funds will kick off the largest residential retrofit effort in the United States. Called CalSPREE, the program aims to cut energy use by 20 percent for up to 130,000 homes in the state by 2012.

The budget also includes $175 million for innovative programs to make zero net energy homes and commercial buildings; $260 million for local efforts to retrofit public sector buildings and save energy; and more than $100 million for education and training programs.

It also phases down subsidies for basic compact fluorescent lamps, shifting to solid state lighting and other efficient light technologies.

(Reporting by Laura Isensee, editing by Marguerita Choy)

California Energy