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Estimates of the Cost and Rate Impact of Proposed Changes to the Energy Efficiency Rule

Estimates of the Cost and Rate Impact of Proposed Changes to the Energy Efficiency Rule. Jay Zarnikau Frontier Associates, LLC June 30, 2010. Outline. Today’s cost of energy efficiency programs Key uncertainties in forecasting future costs: The Commission’s rules Future demand growth

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Estimates of the Cost and Rate Impact of Proposed Changes to the Energy Efficiency Rule

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  1. Estimates of the Cost and Rate Impact of Proposed Changes to the Energy Efficiency Rule Jay Zarnikau Frontier Associates, LLC June 30, 2010

  2. Outline • Today’s cost of energy efficiency programs • Key uncertainties in forecasting future costs: • The Commission’s rules • Future demand growth • How high will incentives levels need to be raised in order to meet higher goals? • Future goals • Future budgets • Rate impacts • Benefits from the programs

  3. Who is EUMMOT? The Electric Utility Marketing Managers of Texas (EUMMOT) is comprised of the energy efficiency program managers at the investor-owned utilities who are responsible for administering the programs designed to meet the state’s goal for energy efficiency. Frontier Associates LLC serves as the staff to EUMMOT.

  4. What are the Costs of These Programs Today? These do not necessarily reflect EECRF’s. These are simply estimates of residential costs (including bonuses) divided by residential energy sales, which are then multiplied by 1,000 kWh (580 kWh, for El Paso Electric Company).

  5. Goals for Energy Efficiency are based upon the growth in weather-adjusted peak demand. Of course, future demand growth is difficult to predict. Just look at weather-adjusted peak demand in some service areas in recent years.

  6. Calculation of Goals • Under the Commission’s rules, goals for a particular year are based on demand growth over the previous five years. • Here is an example: 2010 Goal: 20% x (3,637 – 3,603)/5 = 1.36 MW This is equivalent to taking the average of 5 years of 1-year growth: 20% x((3,637-3,876) + (3,876-3,633) + (3,633-3,823) + (3,823-3,792) + (3,792-3,603) )/5 = 1.36 MW

  7. Future Goal Estimates:Sensitivity to Recent Declines in Load • Because of some significant drops in peak from 2008 to 2009, a few utilities will see large increases in their goals from 2014 to 2015, even though both are 50% of growth 2014 Goal: 50% x (4,054 – 3,876)/5 = 17.8 MW (which would be adjusted upward to 28 MW due to the “ratchet” in the Commission’s rules) 2015 Goal: 50% x (4,120 – 3,637)/5 = 48.4 MW

  8. Here are the goals if we apply ERCOT’s load forecast to the ERCOT TDUs and utility-developed forecasts to the non-ERCOT utilities

  9. In order to receive a maximum bonus, utilities must exceed their goals by enough to generate sufficient “net benefits” (as defined by the Commission’s rules). Net benefits are reduced as incentive levels are increased. Note the sensitivity to incentive levels per MW. More expensive programs lead to more available bonus, which requires a greater achievement to receive.

  10. Assumptions • ERCOT growth rates for ERCOT Utilities; Utility-supplied growth rates are used for the non-ERCOT utilities • Base program costs ($/MW) are those reported for 2008 program year. • All utilities are assumed to achieve kW reductions necessary to receive maximum bonus while maintaining cost-effective programs. • For the Low Scenario, incentive levels per kW of demand reduction remain constant at 2008 levels for all years. • For High Scenario, incentive levels as a % of 2008 incentive levels are as shown below:

  11. Assumptions • Admin and R&D is assumed to be 18% of total program budgets for all years (an increase from 13% reported for 2008). • For the present value calculations needed to calculate avoided costs and bill savings, 2% inflation, 9% discount rate are used in all cases. • 10-year measure life is assumed for all measures except load management. • Energy savings are assumed to equal the minimum mandatory energy goal. • All utilities successfully meet their goals. Note that under Itron’s estimates, El Paso Electric Company, Entergy, Texas-New Mexico Power Company, and Xcel-SPS will have difficulty achieving 50% of demand growth goals.

  12. Total Costs 2012-2015 (Low Scenario, Including Bonuses) Note that AEP-TCC, SWEPCO, Entergy, and Oncor see enormous increases in 2015 mostly due to the way that drop in peak load from 2008 to 2009 affects goal calculation.

  13. Total Costs 2012-2015 (High Scenario, Including Bonuses) AEP-TCC, SWEPCO, Entergy, and Oncor see enormous increases in 2015 mostly due to the way that drop in peak load from 2008 to 2009 affects goal calculation.

  14. 2014 Total Costs (Including Bonus Payments)

  15. 2015 Total Costs (Including Bonus Payments)

  16. Residential Rate Impacts from Energy Efficiencyin 2014

  17. Benefits of Energy Efficiency • Thus far, I’ve presented estimates of the future costs of energy efficiency. • Let’s now discuss the benefits of the programs. • Benefits can be calculated from different perspectives • Utility perspective • From the perspective of the beneficiary of energy efficient products or services provided with the assistance of the programs • From a “non participant’s” perspective • From a broader “total resource” or “societal” perspective

  18. From the Utility’s Perspective • A Utility or Program Administrator perspective is used in Texas to compare costs and benefits. • From this perspective, program benefits are the costs of energy generation and generating capacity that are “avoided” as a result of energy efficiency. • Of course, the ERCOT TDU’s don’t own generating capacity. So, for those utilities, avoided capacity costs may be more of a “market” benefit.

  19. Net Benefits from 2012-2014 Net benefits (i.e., avoided costs minus program costs), cumulative over three program years. Net benefits are lower under the High Scenario because program costs are much higher.

  20. From the Participant Perspective • From the perspective of the beneficiary of energy efficient products or services provided with the assistance of the programs, the benefits are: • Savings on utility bills (as quantified on the next slide assuming $0.10/kWh) • Payments for Participating in Load Management (as quantified on the next slide assuming $40/kW) • Possible improvements in comfort or safety as a result of receiving new equipment (which I haven’t quantified). • We don’t know the “Net Benefits” since we don’t know the consumers’ contribution to the cost of efficiency projects.

  21. Bill Savings 2012-2014 Present Value of Lifetime Bill Savings from program activities over three years.

  22. Benefits from Broader Perspectives • The efficiency programs provide other benefits (which I have not tried to quantify): • Reductions in air emissions from power plants. This is quantified each year by the PUC Staff, Texas A&M Energy Systems Lab, and the TCEQ. • Accelerates the introduction of new technologies into the market place • Fosters a competitive market for energy efficiency services providers • Keeps a few of us consultants busy

  23. Conclusions In the near-term, energy efficiency programs result in rate increases. In the long-term, these programs are cost-effective under the Commission’s definition of cost-effectiveness. That is the supply-side costs that are avoided as a result of the programs exceed the cost of the programs. Future goals, program budgets, and rate impacts are highly sensitive to future load growth. The loss of utility revenues is a concern which must be addressed as goals become more aggressive.

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