Regulatory Treatment of Demand Side Management in the U.S.

Transcription

1 Korea Electric Power Company Demand Side Management Fall 2007 Regulatory Treatment of Demand Side Management in the U.S. AUS Consultants, Inc. P. O. Box 1050 Moorestown, NJ Richard Sedano Regulatory Assistance Project phone:

2 Introduction Regulatory Assistance Project RAP is a non-profit organization, formed in 1992, that provides workshops and education assistance to state government officials on electric utility regulation. RAP is funded by the Energy Foundation, US EPA & US DOE. Richard Sedano was Commissioner of the Vermont Department of Public Service, Wayne Shirley was Chair of the New Mexico Public Utilities Commission

3 The Regulatory Assistance Project RAP Mission: RAP is committed to fostering regulatory policies for the electric industry that encourage economic efficiency, protect environmental quality, assure system reliability, and allocate system benefits fairly to all customers.

4 Regulatory Environment -- History Energy efficiency emerges with 1970s oil shortages Generally seen as peripheral Treated as a social program implemented by utilities an awkward fit Prone attack due to political dogma and focus on short term rates

5 Regulatory Environment -- History Two things happened in 1990s to undercut energy efficiency Industry restructuring and consideration of retail electric competition Natural gas generation busbar prices low and stable Customer generation was encouraged with cheap natural gas

6 Regulatory Environment -- Today Energy Efficiency expanding Experience shows EE is cheap to acquire Hard to build supply resources Generation options costly Environment Security Climate change

7 VT v. NE & US Consumption Economic growth does not mean needing more electricity if efficiency increases.

8 Regulatory Environment -- Today Demand Response is expanding Peak Power is the most expensive, often the most polluting and drives new construction Markets need an active demand side Even storage-heavy areas are reaching their limits of peak support and need demand response Enabling metering technology a key

9 Regulatory Environment -- Today Distributed Generation expanding But is more centered in niche applications CHP, where process energy is needed Clean Energy (wind, solar), aided by subsidy Policy issues remain to be resolved Interconnection Back up rates

10 Regulatory Environment -- Today Regulatory Commissions are upgrading their capabilities Those with experience have been coasting and are reconsidering programs and incentive issues Those without experience are learning basics and coping with staff knowledge deficiencies

11 Legislative Environment As climate change and other energy issues get more attention from the public... Elected officials in Washington and in the states take more of an interest in clean energy policy Resulting in a huge increase in the number of new laws in recent years

12 Federal State jurisdictional line very important, and very clear State authority over retail electric matters, including distribution companies paying for energy efficiency through customer bills There can be federal appliance and equipment efficiency standards Federal authority over wholesale markets

13 Energy Policy Act of 2005 Collected State and Regional policies promoting utility energy efficiency for consideration Energy Efficiency Report available at DOE_EPAct_Sec._139_Rpt_to_CongressFINAL _PUBLIC_RELEASE_VERSION.pdf Consistent with National Action Plan

14 EPACT of 2005 Directs states to consider advanced meter deployment and dynamic rates Inventory of demand response and advanced meters Report at

15 National Action Plan for Energy Efficiency An effort to gain consensus and direction on good ideas to promote energy efficiency in utility sector A leadership group directs the project n/eeactionplan.htm

16 National Action Plan for Energy Efficiency Goal To create a sustainable, aggressive national commitment to energy efficiency through gas and electric utilities, utility regulators, and partner organizations

17 National Action Plan for Energy Efficiency -- Recommendations 1. Recognize energy efficiency as a high-priority energy resource. 2. Make a strong, long-term commitment to implement cost-effective energy efficiency as a resource. 3. Broadly communicate the benefits of and opportunities for energy efficiency. 4. Provide sufficient, timely and stable program funding to deliver energy efficiency where cost-effective. 5. Modify policies to align utility incentives with the delivery of costeffective energy efficiency and modify ratemaking practices to promote energy efficiency investments

18 National Action Plan for Energy Efficiency New Products Examination of Utility Rate Revenue Stability Mechanisms and Incentives (Fall 07) Guidebook on Energy Resource Planning and Procurement Processes (integrating energy efficiency) (Spring 07) Guidebook for Conducting Potential Studies for Cost-Effective Energy Efficiency (Spring 07) Guidebook on Energy Efficiency Measurement and Verification Protocols (Fall 07) Building Codes and Energy Efficiency Fact Sheet (Spring 07) Educational Briefings, sample docket material, and resource lists (Spring 07)

19 National Action Plan for Energy Efficiency Sector Collaboratives: A new way to engage customers Hotels Office buildings Supermarkets Cities

20 Keys to Transition Recognition that supply bias has problems Leadership Identification of beneficial policy changes Sustained commitment to change Including attention to sustaining business models that promote demand side resources

21 Action in the States The DOE study and the Action Plan only reflect new developments in the states that have been already under way

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23 California: Experience, Pride, Fear Leadership in elevating energy efficiency to a high priority and treating it as a power system resource Leadership in working to align incentives to promote energy efficiency Decoupling and shared savings Leadership in dynamic pricing and advanced meter study and deployment Great deal of potential still unrealized

24 leanenergy.pdf

25 California s Strategy is Clear Energy Action Plan I and II Loading, with demand resources first Coordinate EE programs with building energy codes and appliance efficiency standards Meet half of expected load growth with programs Leading to CO 2 and savings in the state s cost of electricity

26 Vermont: Commitment, Innovation Leadership in committing to all costeffective energy efficiency Leadership in centralized administration Considering expansion to include end uses of unregulated fuels See August 2, 2006 order and Act 61 links

27 Texas: Strategic Development Energy efficiency performance standard 10% of forecasted growth, which is significantly below potential Standard increased in 2007 ACEEE Report 073 March 2007

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29 Northwest Power and Conservation Council Four northwest states managing electric energy and rivers in concert Leadership in planning giving full value to energy efficiency They use Monte Carlo techniques to create a probabilistic value for energy efficiency and demand response WA, OR and ID have strong EE programs

30 Iowa and Minnesota Steady energy efficiency programs in both states for a long time Minnesota has a new law that significantly increases expectation for energy efficiency Savings of 1.5% of retail sales each year from programs Effectively eliminates load growth $$ incentives for hitting savings targets 7/sundin.pdf

31 Massachusetts, New York and Connecticut Long time commitment to energy efficiency maintained with retail competition Climate change a new strong motivator Renewed interest leading to examination of decoupling and incentives Governors suggesting all cost-effective energy efficiency goal

32 ISO-New England adds Energy Efficiency to Capacity Market New England has a new capacity market Bids are for 4 years Energy efficiency qualifies as a resource States very supportive, overcame resistance Rules require M&V Rules require year round capacity, so seasonal EE packaged with other resources dr_in_fcm_training_21607.ppt

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34 Colorado, New Mexico, Arizona, Utah, Nevada Sporadic commitment to energy efficiency Climate change a new strong motivator Renewed interest leading to new energy efficiency efforts and new supporting policies Governors providing leadership

35 Arkansas: Collaborative Start-up Leadership from regulator Motivated by concern for natural gas and coal siting and prices Created a sense of inevitability that promoted cooperation from utilities Collaborative quickly led to rules, followed by programs Oklahoma and Kansas looking carefully

36 Illinois, Maryland, Delaware: Rebound from retail competition Poor implementation of retail competition led to big price increases in 2007 Recognition that energy efficiency is important becomes political New laws set very high standards to energy efficiency savings Very little infrastructure in place at the start

37 A Choice of Objectives Save what you can within a budget (MA) All cost effective energy efficiency (VT) Save a certain percentage of forecasted growth (TX) Save a certain percentage of annual retail sales (IL) Figure it out as you go (IA)

38 White Tags Trading Energy Efficiency Some states are considering creating an energy efficiency performance standard, and then allowing trading so that those that can produce more savings that they need to meet their standard and sell the rights to claim the savings to others. Some states are considering folding this into a renewable portfolio standard.

39 Program Trends: It s about the customer Whole Buildings Specialized Services More strategic use of incentives Targeted for system benefit Using the Internet Expanded budgets will mean more attention to retrofit programs

40 Some Elements of Cost-Effectiveness Life-cycle all costs and savings: requires assessment of average measure life Free riders minimize, can t eliminate, appropriate discount Free drivers appear roughly equal to free riders Persistence characterize by program for evaluation, appropriate discount Capacity value avoiding most expensive sales

41 Cost-Effectiveness Tests Choice communicates priorities RIM Test is concerned for the individual and rates Total Resource Test considers the system benefits and long term costs, but ignores external benefits Societal Test considers everything with long term view Using TRC or societal test could produce cost-effective programs equivalent to more than 5% of total utility revenues. Regulator gets to decide what consumers and the state economy can afford, and what cost-effective programs to sacrifice, and to recognize the capital consequences.

42 Cost Effectiveness California Standard Practice Manual: Economic Analysis of Demand Side Programs and Projects

43 Valuing Externalities When you know the value is not zero Control costs Damage costs An adder or factor when control or damage costs are hard to calculate or too controversial to settle on (most typical response) Risk of value being internalized in future

44 Special Issues Low income consumers need a different value proposition to say yes to EE This means that the Benefit/Cost will be lower since these programs will cost more Most states explicitly permit this The US has a national weatherization program, and many states merge the two efforts

45 Special Issues Split Decision-Making Many instances where builder or building owner have different interests than the building occupant Programs need to attract builders and building owners to invest in efficiency even though it adds cost Use financial, recognition, or other incentives

46 Monitoring and Verification An essential element of EE programs Cost recovery Performance standard scoring Shared saving scoring White tags appear to need a higher level of assurance Use for capacity also needs high level of assurance

47 Monitoring and Verification Costs between 3 and 5 per cent of program budgets Deemed savings are increasingly used for high volume measures and reduces cost Need to pay attention to climate zones for temperature sensitive measures. Sufficient separation between program administrator and deemed savings staff IPMVP: commonly used basis

48 Energy Efficiency and Demand Response Highly related and complementary Helps to sell to customers at the same time for comprehensive effect for minimized program cost

49 Combined Commercial Cooling and Lighting Loadshape Baseline, Load Management (STDR), and Energy Efficiency Watts per Square Foot Baseline Load Management Efficient Hour Optimal Energy

50 Combined Commercial Cooling and Lighting Loadshape Baseline, Load Management (STDR), and Energy Efficiency Watts per Square Foot Baseline Efficient Efficient and Load Mng Hour

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52 Energy Efficiency and Dynamic Prices Pricing does convey a message to consumers Charging the same all the time suggests that production costs are the same all the time. This is false Prices that track in a rough way production costs reinforce messages on efficiency Consumption itself is fairly inelastic, so programs are key to savings

53 Demand Response Issues Third Party (Curtailment Service) Providers Experts in demand response technology and sales Able to aggregate many customers into a well-managed portfolio response Capacity Value, Market Rules, Planning

54 Advanced Metering Infrastructure Data storage with communications Opens a door to capabilities that are beyond imagination Costs must be justified today based on known values Known operational values may not justify deployment yet in many utilities California is leading

55 Wholesale Markets and Demand Resources An active demand side is thought to be essential to a functioning wholesale market that serves the public interest Mitigate market power of suppliers Mitigate reliability risks, maximize utilization of existing grid assets Mitigate price volatility Least cost provision of service

56 FERC Role Critical, yet Delicate FERC is responsible for overseeing wholesale markets FERC doing a good job looking for opportunities to promote more demand resources Demand resources are inherently retail, so states must do their part to enable them and FERC looks for ways to encourage

57 Utility Financial Interests in EE Cost Recovery The Throughput Incentive Performance Incentives

58 1989 NARUC Resolution Reform regulation so that successful implementation of a utility s least-cost plan is its most profitable course of action How are we doing in achieving this objective?

59 Policy Trends: Aligning Incentives Utilities have gone along with programs As long as they don t lose too many sales Customers like it They like it if some lost revenues are restored Traditional cost of service provides $$ upside between rate cases as sales grow the throughput incentive Energy efficiency has not been in utilities financial interest

60 Aligning Incentives: Solutions Cost Recovery Tariff Riders becoming more prevalent A certain amount is included in rates Deviations in spending are reconciled periodically Utilities looking for certainty of recovery and speed to account for changes Some public process to assure changes are in the public interest helps to enable

61 Aligning Incentives: Solutions Throughput Incentive Independent Administration Lost Revenue Calculation and Recovery Decoupling

62 Aligning Incentives: Solutions Financial Incentives Shared Savings (California) Bonus return on equity (Nevada) Performance rewards (several states) Compensation keyed to avoided cost (Duke)

63 Overview Goals: Create a much more energy-efficient economy Create a profitable EE business model for utility companies Problem statement: Utility profitability is linked directly to sales volumes between rate cases (= all the time) Recommendation: Decouple fixed cost recovery from sales volumes (one way is Revenue-Per-Customer true-ups to recover utility base revenues). Also needed: Performance incentives and shared savings for superior utility performance and added customer value

64 Traditional Regulation Provides Strong Disincentives for Customer-Sited Resources Utility revenues and profits are linked to unit sales (kw, kwh, therms, etc.) But, in the short run, a utility s marginal costs are only vaguely related to electricity demand (more on this in a moment) Loss of sales due to successful expansion of energy efficiency and DG/CHP will lower utility profitability Effect remains even with well-designed EE policies: The incentive remains to boost sales even where utilities receive net lost revenue recovery for utility-sponsored EE The effect can be quite powerful...

65 A Sample Distribution Utility Assumptions Operating Expenses $160,000,000 Rate Base $200,000,000 Tax Rate 35.00% Weighted Cost Rate Dollar Amount Cost of Capital % of Total Cost Rate After-Tax Pre-Tax After-Tax Pre-Tax Debt 55.00% 8.00% 4.40% 2.86% $8,800,000 $5,720,000 Equity 45.00% 11.00% 4.95% 7.62% $9,900,000 $15,230,769 Total % 10.48% Revenue Requirement Operating Expenses Debt Equity Total Allowed Return on Equity $160,000,000 $5,720,000 $15,230,769 $180,950,769 $9,900,000

66 Sales Affect Earnings % Change in Sales 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% Revenue Change Pre-tax After-tax $9,047,538 $5,880,900 $7,238,031 $4,704,720 $5,428,523 $3,528,540 $3,619,015 $2,352,360 $1,809,508 $1,176,180 $0 $0 -$1,809,508 -$1,176,180 -$3,619,015 -$2,352,360 -$5,428,523 -$3,528,540 -$7,238,031 -$4,704,720 -$9,047,538 -$5,880,900 Impact on Earnings Net Earnings % Change Actual ROE $15,780, % 17.53% $14,604, % 16.23% $13,428, % 14.92% $12,252, % 13.61% $11,076, % 12.31% $9,900, % 11.00% $8,723, % 9.69% $7,547, % 8.39% $6,371, % 7.08% $5,195, % 5.77% $4,019, % 4.47%

67 Least-Cost Service Should be the Most Profitable The throughput incentive is at odds with public policy to supply electric power services at the lowest total cost: inhibits a company from supporting investment in and use of leastcost energy resources, when they are most efficient, encourages the company to promote incremental sales, even when they are wasteful Ratemaking policy should align utilities profit motives with public policy goals: acquiring all cost-effective resources, whether supply or demand The utilities throughput incentive promotes inefficient outcomes, even where: there is no programmatic energy efficiency; and even with third-party administration of energy efficiency programs. We need a different business model for utility profitability

68 Solution: Decouple base revenues from sales volume Breaks the mathematical link between sales volumes and base revenues* (and, ultimately, profits) Makes revenue levels immune to changes in sales volumes Enables recovery of the utility s prudently incurred fixed costs, including return on investment, in a way that doesn t undermine customer savings and an efficient economy Two objectives: To protect the utility from the financial harm associated with leastcost actions and To remove the utility s incentive to increase profits by increasing sales in other ways (e.g., electric heat promotions, reluctance to support appliance standards) * Remember: base revenues are those covering costs that are essentially fixed in the short run, like capacity, wires, and meters. Variable costs, like fuel, can flow through a FAC or kwh rate.

69 Revenue Decoupling: The Essential Concept Basic Sales-Revenue Decoupling Utility base revenue requirement determined with traditional rate case Each future period has a calculable allowed revenue requirement Differences between the allowed revenues and actual revenues are tracked No magic time period for tracking differences, or for trueups to bring in the desired revenue (monthly, quarterly, annually) The difference (positive or negative) is flowed back to customers in a small adjustment to unit rates

70 Calculating allowed revenues Regulation should link utility cost recovery to the costs the utility faces First thought: True-up recovery to cover a single dollar amount of total fixed costs Second thought: Use average revenue-percustomer In the long-run total demand is the main cost driver But in the short-run (the rate-case horizon) Utility costs vary more directly with numbers of customers than with sales Particularly true of distribution, where the marginal costs of delivery are, on average, very low or nil, but for which the costs of acquiring and serving customers are significant and recurring So total revenue Demand can Side growth Management -as Fall 2007 customer base grows

71 Revenue-Per-Customer Decoupling Holds class average revenues-per-customer (RPC) constant Or may have a periodic increase or decrease in average revenues-per-customer Industrial customers may be treated separately Based on prior rate case values Monthly (or other periodic) true-up mechanism allows up or down adjustments in the RPC tracker similar to traditional fuel and purchase power adjustments

72 What incentives remain for utilities and customers? Utility perspective: Decoupling revenues, rather than earnings directly, preserves the utility s incentive to improve its operational and managerial efficiency Customer perspective: This is a revenue issue, not a pricing or rate design issue: it is not intended to decouple customers bills from consumption Traditional unit-based consumption prices (per kw and per kwh) remain Customers should continue to see the cost consequences of their consumption decisions Unit-based consumption pricing reflects the relationship between demand and cost causation in the long-run Including the costs of wires, generation, and external costs

73 Maryland example:bg&e Decoupling Allowed Base Revenues = Test Year Average Use per Customer * Delivery Price * No. of Customers Adjustment to Delivery Price = (Allowed Revenues - Actual Revenues) Estimated Sales Any difference between actual and estimated sales is reconciled in a future month Calculated separately for each class Calculations of the billing adjustments are filed monthly with the Public Service Commission If needed, different factors can be used to capture the cost and revenue differences between existing and new customers

74 Decoupling Examples: Maryland BGE, PEPCO North Carolina Gas Utilities California 3 IOUs Electric & Gas Utilities Oregon Northwest Natural Gas New Jersey (NJNG) Utah (Questar) Indiana & Ohio (Vectren) Vermont (GMP)

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76 Applying RPC decoupling on a multi-year basis RPC value can be periodically adjusted for inflation, productivity increases, or other factors Can be combined with performance goals and incentives: Decoupling + PBR is a good package Adjustments can be bounded (SDG&E, SoCalGas) and/or shared with customers (PG&E, Northwest Natural Gas) California has the most comprehensive decoupling and PBR mechanisms

77 Questions for discussion Decoupling as a building block in a shared savings/value proposition Is decoupling essential? Is it enough? Why not just go to high fixed customer charges? Decoupling and utility risks How are weather risk, sales, and profits affected? Does decoupling shift risks to customers? True-ups and rate volatility Comparing FAC and RPC trackers How often should we true up the RPC? Should true-ups be capped? What formulas are best? Total revenue approach Revenue per customer different customer classes? Adjust for inflation? For productivity? How does decoupling mesh with PBR and shared savings? Isn t decoupling part of a shared savings business model?

78 Resources Website: MADRI Model Revenue Stability Rider _Revenue_Stability_RateRider_ pdf RAP Efficiency Policy Toolkit: