Perspectives on an Energy Efficiency Portfolio

1. Perspectives on an Energy Efficiency Portfolio Institute for Regulatory Policy Studies Transforming the Electricity Market Val Jensen ICF International vjensen@icfi.com

2. Some Structure • Theology v. Realpolitik • Context is everything • Measures, Programs and Portfolios • Measuring Goodness • What’s next

3. Theology There is huge untapped potential for efficiency gains Utilities have a responsibility to promote efficiency improvement as part of their charter The presence of market barriers ensures that customers will never invest in the optimal level of energy efficiency Societal cost effectiveness should drive decisions Demand response is another way of saying “We don’t want to support energy efficiency” As long as all customers have an opportunity to participate in programs, there is no cross-subsidization Once consumers face true prices, they will select the optimal levels of consumption and efficiency The utilities’ responsibility is to provide electricity or natural gas as efficiently as possible Utility incentives for energy efficiency constitute subsidies/cross-subsidies Price impacts should drive the decision Energy efficiency does not provide the same certainty as a supply-side resource Utility funding of energy efficiency requires cross-subsidization These are social programs

4. Realpolitik • Consumers tend to be myopic • Prices might not matter as much as costs, but information on both gets their attention • Utilities can, by their involvement have a significant and positive transformative effect on the market • Energy efficiency is the cheapest way to reduce/offset GHG emissions • Best practice involves a blend of DR and EE • There are ways to design and recover the costs of programs that minimize cross-subsidization • There are solid consumer service and customer satisfaction reasons for this • Demand-side resources can reduce the need for more expensive supply.

5. Context is Everything 7 • Illinois has consistently ranked low in energy efficiency spending and achievement relative to other large states: • Illinois is the 5th largest state, but ranks 36th in energy efficiency funding per capita • IL ranks 24th overall in energy efficiency spending and 35th in overall savings (ACEEE, 2002) • Spending has bumped up recently, but is shareholder-funded. • What would constitute transformation?

6. Context is Everything , Part 2 • MEEA (2006) estimates that electricity savings potential in the 20th year of its analysis could equal about 4% of baseline Illinois sales in that year (slightly over 2 million MWh) at a cost of <= $60/MWh • Total cost to get those MWh would be roughly $71M (from now till then) • Maybe can get there from here • MEEA estimates total achievable potential to be 8.9% by the 20th year at a cost of <= $150/MWh • Total cost of $480M • Well beyond current reach?

7. Measures, Programs and Portfolios: How this gets Done • Establish portfolio objectives • Measure Screening • Market assessment – including the POTENTIAL STUDY. • Program screening • Portfolio construction and analysis • Pass programs to the integration stage • Develop implementation plan

8. Setting and Using Portfolio Objectives

9. Portfolio Mapping

10. The Potential Study

11. Portfolio Construction Principles Achieve Portfolio Objectives Manage the Risk Residential Energy -2010 Market Technology Performance Evaluation Commercial Energy -2010

12. Measuring Goodness • The meaning of goodness is at the heart of theology • And if there is a holy war in this business it is over how one judges goodness • The Church of the Almighty TRC • The United Church of the RIM

13. Measuring Goodness: An Illustration Good or Evil? System benefits of $3.1B RIM Cost of $4.9B – Participant Benefit of $6.7B “Upward pressure onrates” Net Consumer Benefit of $1.8B

14. What’s Next: Emerging Best Practice • More efficient pricing is inevitable and overdue • Very positive results from pilots in terms of demand response • Disappointing participation to-date, but at some point this will be the default • This will drive very interesting combinations of controls and energy-using equipment • This will cause some wailing and gnashing of teeth • Will tend to undercut a central tenant of energy efficiency community (we need DSM to compensated for average cost pricing) • The economics of energy efficiency could change significantly • The TRC economics will change as DR cuts peak prices • The Participant economics will change – pure energy-saving devices will look less good. • Will this put a dent in the least expensive carbon strategy? • The marriage of DR and EE will take place • Who will adopt whose theology?