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APPENDIX A:

COUNTRY REVIEW OF EXISTING MECHANISMS FOR PROMOTING DSM AND ENERGY EFFICIENCY

SERVICES IN NEW BUSINESS ENVIRONMENTS

Appendix A: Country Review of Existing Mechanisms IEA DSM PROGRAMME (TASK IV)

October 1996 A — 2


APPENDIX CONTENTS

1. OVERVIEW......................................................................

2. AUSTRALIA.....................................................................

2.1 Overview..........................................................................

2.2 Power Sector Restructuring.............................................2.2.1 Electricity Sales, Demand, and Capacity..................................2.2.2 Projected Needs for New Energy Resources and Capacity.....2.2.3 Industry Structure, Market Type and Regulation....................

2.3 Review Of Mechanisms....................................................2.3.1 Overview....................................................................................2.3.2 Existing Mechanisms.................................................................

2.4 Pending Proposals and Key Future Issues.......................2.4.1 National Grid Protocol...............................................................2.4.2 NGMC Discussion Paper on Demand Management Opportunities......................................................................................2.4.3 ANZMEC Study of Demand Management and Integrated Resource Planning..............................................................................2.4.4 ESAA Consultancy Study on Barriers to Utility Promotion of Energy Efficiency................................................................................2.4.5 Government Pricing Tribunal Paper on Price Regulation and Demand Management.........................................................................2.4.6 NGMC Recommendations.........................................................2.4.7 Australia Institute Proposal for a Tradeable Emissions EntitlementsScheme................................................................................................2.4.8 Summary of Policy Conclusions................................................

2.5 References.......................................................................2.5.1 Key Organizations and Contact Persons...................................2.5.2 Bibliography...............................................................................

3. FINLAND........................................................................

3.1 Overview..........................................................................

3.2 Power Sector Restructuring.............................................



3.2.1 Power Supply and Demand.......................................................3.2.2 Projected Needs for New Energy Resources and Capacity.....3.2.3 Industry Structure and Ownership...........................................3.2.4 Power Market.............................................................................3.2.5 Industry Regulation...................................................................

3.3 Review Of Mechanisms....................................................3.3.1 Energy conservation policy.......................................................3.3.2 Public service responsibility......................................................3.3.3 Funding Sources........................................................................3.3.4 Intervention Method..................................................................3.3.5 Intervening Organizations.........................................................

3.4 Pending Proposals for Mechanisms and key Future Issues.....................................................................................

3.4.1 Negotiated agreements.............................................................3.4.2 Stimulating the growth of a viable ESCO Industry..................3.4.3 Demand bidding into the wholesale power pool......................

3.5 References.......................................................................3.5.1 Key Organizations and Contact Persons...................................3.5.2 Key Literature............................................................................

4. UK................................................................................

4.1 Overview..........................................................................

4.2 Power Sector Restructuring.............................................4.2.1 Energy Demand.........................................................................4.2.2 Projected Needs for New Energy Resources and Capacity.....4.2.3 Industry Structure, Market Type, Regulation/Competition.....

4.3 Review of Mechanisms.....................................................4.3.1 Public Policy DSM......................................................................4.3.2 “Energy efficiency standards of performance”........................4.3.3 Business Based DSM.................................................................

4.4 References.......................................................................

5. NEW ZEALAND................................................................



5.1 Overview..........................................................................

5.2 Power Sector Restructuring.............................................5.2.1 Electricity Sales and Demand...................................................5.2.2 Projected Needs for New Energy Resources and Capacity.....5.2.3 Industry Structure, Market Type, Regulation/Competition.....

5.3 Review Of Mechanisms....................................................5.3.1 Overview....................................................................................5.3.2 Restructuring and Implications for Mechanisms for ImplementingDSM.....................................................................................................5.3.3 Existing Mechanisms and Historical Achievements................5.3.4 Pending Proposals and Key Future Issues...............................

6. NORWAY.........................................................................

6.1 Overview..........................................................................

6.2 Power Sector Restructuring.............................................6.2.1 Energy Demand.........................................................................6.2.2 Projected Needs for New Energy Resources and Capacity.....6.2.3 Industry Structure and Ownership...........................................6.2.4 Regulation..................................................................................6.2.5 The wholesale power market....................................................6.2.6 The retail market and customer response................................

6.3 Review of Mechanisms.....................................................6.3.1 Overview....................................................................................6.3.2 Public Policy Based DSM...........................................................6.3.3 Business Based DSM.................................................................6.3.4 Pending Proposals and Key Future Issues...............................6.3.5 References.................................................................................

7. SPAIN............................................................................

7.1 Overview..........................................................................

7.2 Structure and Regulation of the Spanish ESI...................

7.3 Power Sector Restructuring.............................................



7.4 Review of Existing Mechanisms.......................................7.4.1 Introduction...............................................................................7.4.2 DSM Activities in 1995........................................................1047.4.3 Utility based DSM and energy efficiency.................................

7.5 References.......................................................................

8. SWEDEN.........................................................................

8.1 Overview..........................................................................

8.2 Power Sector Restructuring.............................................8.2.1 Energy Demand.........................................................................8.2.3 Industry Structure, Market Type, Regulation/Competition.....

8.3 Review Of Mechanisms....................................................8.3.1 Overview....................................................................................8.3.2 Existing Mechanisms and Historical Achievements..........1208.3.3 Pending Proposals and Key Future Issues.........................1228.3.4 References.................................................................................

9. UNITED STATES........................................................125

9.1 Overview....................................................................125

9.2 Power Sector Restructuring.......................................1269.2.1 Energy Demand...................................................................1269.2.2 Projected Needs for New Energy Resources and Capacity.......................................................................................................1269.2.3 Industry Structure, Market Type, Regulation/Competition.......................................................................................................126

9.3 Review Of Mechanisms..............................................1299.3.1 Overview and Background..................................................1299.3.2 Profile of Existing Mechanisms and Existing and Pending Proposals.......................................................................................1339.3.3 Future Issues — Areas of Agreement and Disagreement. 1409.3.4 References...........................................................................145



1OVERVIEWThis document reviews existing and planned mechanisms for promoting DSM and energy efficiency in countries which have experienced some form of power sector restructuring. Mechanisms in the following countries are reviewed:

· Australia

· Finland

· England and Wales

· New Zealand

· Norway

· Spain

· Sweden

· United States

The information was collected through extensive interviews with policy makers and key decision makers in electricity industry businesses in countries or regions that have implemented, or are considering implementing, specific mechanisms to promote DSM and energy efficiency in a restructured electricity market. For each country, the following information is provided:

· Overview of electricity sector restructuring — this includes a brief description of electricity sales, demand, and capacity, a review of projected needs for new energy resources and capacity, as well as a review of the electricity industry structure, electricity market type, electricity sector regulation and introduction of competition.

· Review of mechanisms — this includes a description of existing and proposed mechanisms in terms of:

· Type of intervention activity — including, market transformation programs; customer and vendor education; energy efficiency business start-up assistance; training, research, development and demonstration; renewable resource programs; greenhouse gas emissions reduction activities; lost



opportunity programsa; DSM bidding and standard offer initiatives; codes and standards development and enforcement.

· Implementing organization — including distribution utility, independent non-profit organization, state or government agency, or other.

· Funding source — including non-bypassable, non-discriminatory wires charge levied on all or all but largest customers, non-bypassable, non-discriminatory wires charge levied on all customers of all fuel types, general tax revenues, or tax on all energy providers (all fuel types).

For each country reviewed a range of issues is discussed, including:

· Key issues affecting the decision to select/reject particular mechanisms;

· Particular areas of agreement/disagreement;

· Issues which are key concerns for the future regarding electricity sector restructuring and the new business environment it creates for DSM and energy efficiency services.

aLost opportunity programs are those that attempt to influence time-bound, energy-related decisions (e.g., new construction equipment selection or insulation, replacement of failed equipment), rather than decisions that might occur at any time (early replacement or retrofit decisions, e.g., lighting replacements).



2AUSTRALIA

Overview

The restructuring of the Australian electricity supply industry (ESI) has been proceeding for nearly seven years since the ESI itself set up an industry reform working group during 1989. The restructuring consists of:

· Establishment of the National Grid Management Council;

· Unbundling of the ESI functions (generation, transmission, distribution and retail supply) into separate businesses

· Development of a wholesale competitive electricity market, initially in the three interconnected systems (New South Wales, Victoria and South Australia);

· Development of a retail competitive market (initially in Victoria and New South Wales and possibly later in other States);

· Establishment of interconnections with two other systems (Queensland and Tasmania) and their inclusion in the market;

· Corporatization of government-owned electricity businesses;

· Privatization of government-owned electricity businesses (currently in Victoria only).

DSM began to be used in Australia in the late 1980’s as a means to (1) defer the need to build new generating stations, (2) reduce greenhouse gas emissions, and (3) provide increased levels of customer service. DSM could have fitted well with Australia’s government owned electricity industry which was expected to provide a significant level of community service. However, the regulatory incentives for the industry to do so (e.g., program and lost revenue cost recovery) had not been put into place, which left the industry in the position of potentially suffering large financial losses from implementing DSM.


Few regulatory incentives for the industry to promote DSM (e.g., program and lost revenue cost recovery)


The restructuring of the industry has now changed the incentives for DSM and energy efficiency programs. Although until recently, senior managements of electricity businesses have generally been relatively unfavorably disposed to both DSM and energy efficiency programs, in the new industry environment some evidence of active involvement is beginning to appear. Retail supply, and distribution (‘wires”) businesses are surfacing as the parts of the industry with the greatest interest in DSM and energy efficiency. Some of these businesses are starting to identify commercial opportunities in demand-side options. Transmission businesses should also have commercial incentives to use DSM and energy efficiency as cost-effective alternatives to network augmentation, but there is little evidence that these businesses are recognizing commercial opportunities in demand-side options. Generators have little commercial interest in DSM and energy efficiency.

The specific benefits that DSM and energy efficiency programs can provide electricity businesses have been cited as follows:

· Deferral of transmission and distribution system augmentation (particularly where such augmentation is required as a result of low load factor load growth).

· Management of risk in exposure to spot market pool prices (this will likely be accomplished through load management and flexible load shape strategies).

· Profit maximization by using a demand-side resource to “free-up” electricity that can then be sold into the pool at a higher price.

· Increased customer service to help retail suppliers differentiate themselves from competitors and thereby retain current customers and attract new ones.

· Compliance with government requirements and corporate responsibilities in the franchise market.



Power Sector Restructuring

1Electricity Sales, Demand, and Capacitya

Total electricity generated in Australia in FY 92-93b was approximately 152,000 GWh. This represented a 3.3% increase over the previous year, although growth in generation varied widely from state to state, from a high of 14.4% in South Australia, to a low of -2.7% in Victoria.

Table 1 shows actual FY 92-93 electricity generation and forecasts for the following year (93-94) and for the subsequent fifth and tenth years. As can be seen, growth nationally is expected to be moderate, averaging 3.3% per year over the next ten years. Queensland and Western Australia are projected to show the strongest growth, and Tasmania the weakest.

Sales to the residential sector represented 31% of total consumption in FY 92-93. Breakdown by commercial and industrial facilities is not available in all states. In the four jurisdictions where such data are available (Victoria, Queensland, South Australia and Tasmania) commercial sector sales averaged 21% of total, and industrial sales 48%.

2Projected Needs for New Energy Resources and CapacityTotal installed capacity in FY 92-93 was 35.6 GW, with coal-fired plant pre- dominating. Hydro plants represented 21% of installed capacity but only 10% of electricity generated.

Reserve margins vary widely by region and are highest in New South Wales and Victoria. Based on the reserve margins in these two states and the upgrading of interconnection between the eastern states (see discussion below), it is generally considered that no new large baseload generating facilities will be needed in the country until 2003 or later.

Interconnections are somewhat limited. Major interconnections exist between New South Wales and Victoria (including the Snowy Mountains Hydro-Electric Scheme)and Victoria and South Australia. Upgrading of these interconnections is contemplated as part of the integration of the National Grid in the eastern states. A high voltage interconnection between New

a All data in this section is taken from “Electricity Australia 1994”, published by the Electricity Supply Association of Australia.b This is the most recent year for which national figures are available. Figures for FY 93-94 are not available for Victoria due to the disaggregation of the industry there. No figures are yet available for FY 94-95.



South Wales and Queensland of 500 MW capacity is already planned for construction but was rejected by a new Queensland Government in April 1996. Further discussions are being held about this project.



0Table 1 Australian Electricity Generation Forecast, by State (MWh)

StateNew South Wales

Victoria Queens-land

South Australia

Western Australia

1992/1993 51786 37424 28325 8931 96431993/1994 54044 37788 29901 9250 10063Growth Rate for 1 Year 4.4% 1.0% 5.6% 3.6% 4.4%1998/1999 61306 42029 40192 10330 12505Average Annual Growth Rate for 5 Years

3.7% 2.5% 8.4% 3.1% 5.9%

2003/2004 68614 46040 46924 11370 14816Average Annual Growth Rate for 10 Years

3.2% 2.3% 6.6% 2.7% 5.4%

StateTasmania Northern

TerritorySnowy Mountains HEA

Total Australia

1992/1993 8849 889 6451 1522981993/1994 9040 956 5129 156171Growth Rate for 1 Year 2.2% 7.5% -20.5% 2.5%1998/1999 10030 1239 5129 182760Average Annual Growth Rate for 5 Years

2.7% 7.9% -4.1% 4.0%

2003/2004 8138 1360 5129 202391Average Annual Growth Rate for 10 Years

-0.8% 5.3% -2.0% 3.3%

In several states (Western Australia, Northern Territory, Queensland, and South Australia), there are a number of isolated generating systems, mostly operating on diesel sets.

3Industry Structure, Market Type and Regulation

Overview

Historically, the Australian electricity supply industry has been owned and operated by various levels of Government. Generation and transmission has typically been owned and run by the six state governments and the government of the Northern Territory.a The industry in four of the states and the a The exception is the Snowy Mountain Hydro-electric Scheme, which is owned by the Commonwealth Government with the State governments of New South Wales and Victoria having rights to set percentages of the energy generated. The Snowy Scheme is currently being corporatized and will then be owned jointly by the three



Northern Territory has historically been vertically integrated. In the jurisdictions where the industry has not been vertically integrated, the distribution end of the industry has been owned and operated by local government. Table 2 provides an overview of how the industry was structured until quite recently.

1Table 2 Structure of the Australian Electricity Supply Industry (1994-95)

State/Territory OwnershipGeneration / Transmission

Distribution

New South Wales State LocalVictoria State Mostly state, some localQueensland State LocalWestern Australiaa State StateSouth Australia State StateTasmania State StateAustralian Capital Territoryb N/A TerritoryNorthern Territory 5 Territory Territory

Unbundling of ESI Functions

A major objective of the restructuring is to unbundle the four functions carried out by the Australian ESI. The two ‘wires’ functions - transmission and distribution - are natural monopolies. The generation and retail supply functions, until recently also structured as monopolies, are progressively being opened to competition. (Retail supply involves purchasing electricity in bulk and reselling it to retail customers.)

Until recently, the various ESI functions have not been organized as separate businesses. Now, however, the restructuring of the industry is based on unbundling the functions. In some States, separate business entities are being established to carry out each of the functions. In other States, the business activities that relate to each function are being financially ‘ring fenced’ within one entity.

In addition to the changes that are taking place at the state level, significant changes are also taking place at the national level. In line with federal initiatives to increase competition, a fully competitive wholesale electricity market is being established. Initially, this market will include New South Wales, Victoria and

governments.a The State Energy Commission of Western Australia was the only energy utility that served both electricity and gas. These two operations have recently been split into two separate companies.b Energy utilities in both of the two territories also supply water to end-use customers.



South Australia. Queensland and Tasmania may join at a later date once electrical interconnection is established between their systems and the three state interconnected system.

Table 3 summarizes the structural changes that are in process or on the horizon.

2Table 3 Overview of Power Sector Restructuring in Australia

State/Territory

Changes to Date orin Progress as at June 1996

Changes Scheduled/Foreseen

New South Wales

Commercialization of operations.Split-up of generation and transmission functions into separate business entities.Horizontal split-up of the generation utility into three separate government-owned business entities.Amalgamation of distributors (from 25 to 6).Separation of distribution and retail functions within organizations.Development of alternative pricing mechanism (cap on gross margin) for the franchise market.Establishment of an intra-state competitive wholesale electricity market.

Removal of monopoly franchises over end-use customers progressively in order of size of customer demand.Introduction of electricity traders (non-asset owners).Participation in the three state competitive wholesale electricity marketEstablishment of an intra-state competitive retail electricity market.

Victoria Commercialization of operations.Separation of generation, transmission, distribution and retail functions.Amalgamation of distributors (from 29 to 5).Horizontal separation of generation and establishment of individual power stations as separate companies.Establishment of an intra-state competitive wholesale electricity market.Privatization (sale) of distributors.Privatization (sale) of generators.Removal of monopoly franchises over end-use customers progressively in order of size of customer demand.Introduction of electricity traders (non-asset owners).

Participation in the three state competitive wholesale electricity marketEstablishment of an intra-state competitive retail electricity market.



State/Territory

Changes to Date orin Progress as at June 1996

Changes Scheduled/Foreseen

Queensland Commercialization of operations.

Split of generation and transmission functions into separate business entities.

Transmission and distribution functions combined into a holding company structure.

Removal of monopoly franchises over end-use customers.

Separation of distribution and retail functions within organizations

Introduction of electricity traders (non-asset owners).

Western Australia

Commercialization of operations.

Split up of electricity and gas utility to separate entities.

Possible separation of generation and transmission functions.

Opening of grid to access by IPPs.

South Australia

Commercialization of operations

Separation of generation, transmission and distribution functions within one vertically integrated utility

Possible further separation of industry functions and split up into separate business entities

Removal of monopoly franchises over end-use customers.

Participation in the three state wholesale electricity market

Tasmania Commercialized operations

Separation of generation, network and retail functions into different business units within one vertically integrated utility

Corporatization

Private generation and open network access

New regulatory and pricing mechanisms

Publication of spot prices

Australian Capital Territory

Corporatization of monopoly electricity and water distributor

Participation of distributor in the three state competitive wholesale electricity market

Northern Territory

National Grid Management Council (NGMC)

The Australian electricity supply industry itself initiated the process of restructuring the industry by setting up an industry reform working group during 1989. Governments became involved in this process in November 1990, when a working group to discuss the feasibility of a national electricity grid was established by heads of government meeting as the Special



Premiers’ Conference. In July 1991 the National Grid Management Council (NGMC) was established by heads of government. The objectives of the NGMC are: to encourage open access to the eastern and southern Australian electricity grid; encourage free trade in bulk electricity; co-ordinate planning of generation and transmission; and encourage competitive sourcing of generation capacity and the use of demand management.

The Competitive Electricity Market

The establishment of a competitive market for electricity in southern and eastern Australia is the major change in the structure of the ESI which is driving all the other changes. (Western Australia and the Northern Territory will always be excluded from the so-called ‘national’ electricity market because of the lack of electrical interconnection and the vast distances from the southern and eastern States.) The market is expected to commence operation during 1996. It will be in two parts: wholesale and retail.

The wholesale market will consist of the sale of bulk electricity by generators to retail suppliers and large end-use customers. ‘Large’ is defined as customers with a maximum demand of 10 megawatts or more (5 megawatts in Victoria where a competitive wholesale electricity market commenced operation in late 1994). The wholesale market will be completely competitive, with any participant able to purchase from any other. There will be three levels of trading:

· Bilateral long-term contracts covering fixed amounts of energy over specified time periods under set prices;

· Short term forward market trading in which buyers and sellers lock in energy prices by trading buy/sell offers similar to those which drive other financial markets;

· Spot trading with energy traded through a commodities-type pool and a spot price set every half hour by the last (most expensive) generator selected to run. All wholesale electricity will be accounted for through the pool.

Participants in the wholesale market can choose to play in any combination of these levels of trading

The retail market will consist of sales of electricity by retail suppliers to end-use customers. This market will be partly competitive and partly on a franchise basis. Retail suppliers will be able to compete to supply those large customers which choose not to purchase directly from the wholesale market. These customers will therefore be ‘contestable’. Initially, end-



use customers with a maximum demand of less than 10 megawatts (5 megawatts in Victoria) will be supplied by their local retail supplier. These customers will therefore be ‘non-contestable’. Each retail supplier will hold a franchise to supply all non-contestable customers located in a particular geographical area. It is likely that the 10 megawatt limit which defines contestability of customers will be gradually reduced, though no timetable has been set for this.

Both generators and end-users will be required to pay network charges to cover the cost of transporting electricity from the generator to the point of end-use. Participants in the wholesale market will be responsible for paying their local network owner a connection charge and a ‘use of system’ charge. However, the network charges incurred by end-users in the retail market will be paid for them by their retail supplier who will package these charges together with the energy charge to provide one price to the end-user.

The network pricing principles agreed by the Council of Australian Governments in February 1994 call for ‘cost reflective’ pricing that properly allocates the cost of providing network service to those participants who actually use it. However, it is recognized that if this principle is adopted immediately, it may cause undue hardship for a number of participants. It is therefore accepted that there will need to be some averaging or sharing of network costs.

Review Of Mechanisms

1Overview2.1.1History of DSM Programs in Australia

Certain demand-side management activities - primarily direct load control and clock-control of residential water heaters - have had a long history in Australia, dating back to the mid-1930s. Introduction of these strategies was undertaken because of their clear benefits to system operation by shifting electricity demand and use from system peak periods. Peak periods have historically occurred in most service areas in early to mid-evening hours on winter weekdays. Load shifting strategies have virtually always been supported by tariff (rate) incentives.

Other types of DSM (including the extension of peak clipping and load shifting strategies from the residential to the commercial and industrial sectors) have only a limited history and level of use in Australia as compared to the United States. This is primarily due to the difference in regulatory regimes in the two countries. As mentioned earlier, until very recently all



of the electricity utilities in Australia were operated as part of government. Price regulation was generally undertaken using a CPI-x approach, and was conducted as an inter-departmental matter within government.

The investigation and application of DSM in its wider sense did not gather significant momentum until the late 1980’s when the then State Electricity Commission of Victoriaa (SECV) planned and (in 1990) launched its three-year Demand Management Action Plan, funded at A$55 million. The DM Action Plan was motivated by three primary factors:

· Deferral of the need to build new generating stations;

· Reduction in greenhouse gas emissions due to increased end-use electricity efficiency;

· Increased levels of customer service.

These factors, in varying proportions, have also served to motivate the demand-side activities that have taken place in other states. In general, these activities have tended to focus on information and technical assistance programs, such as energy audits. Outside the SECV DM Action Plan (which ended in 1993), very few utilities have offered direct financial incentives as part of their DSM programs. The reasons for this have included: (1) the absence of a regulatory mechanism for ensuring recovery of DSM program costs (including financial incentives) and/or lost revenues, and (2) a widely held belief that direct financial incentives tend to (a) distort the market and (b) become self-perpetuating.

2.1.2Development and Implementation of Mechanisms

Policy and regulatory mechanisms for promoting DSM and energy efficiency have a much shorter history in Australia than DSM programs. Australia was insulated from the oil price shocks of the 1970s because the majority of oil used in Australia was produced from indigenous resources. Therefore, governments did not develop the aggressive energy conservation campaigns seen in many North American and European countries during the 1970s.

The first policy and regulatory mechanisms implemented in Australia were developed by governments from the early 1980s in response to growing global concerns about environmental

a The SECV no longer exists. It has been split into five separate generation companies, a high voltage transmission company, a transmission system operator and wholesale market management company, and five distribution companies.



issues. In New South Wales, these mechanisms were developed also in response to unexpected breakdowns of electricity generating plant which lead to electricity shortages in that State. These first mechanisms were mainly information and education campaigns targeted at broad general audiences.

From the mid 1980s more specific mechanisms have been introduced by governments, commencing with appliance labeling and moving on to support for energy auditing (in all sectors including energy auditing of homes for low income households) and the development of energy efficiency building codes and minimum energy performance standards for appliances.

More recently, mechanisms focusing specifically on achieving reductions in greenhouse gas emissions have been implemented, including voluntary agreements to reduce emissions and the establishment of a Sustainable Energy Fund by the State Government of New South Wales. The New South Wales electricity industry regulator has introduced revenue regulation for electricity businesses with the stated aim of reducing barriers to the implementation of DSM program. Also in New South Wales, the Government has imposed a condition on the licenses for electricity retail suppliers which requires them to develop plans for DSM and energy efficiency strategies. The mechanisms currently implemented in Australia are described in more detail below.



2Existing MechanismsTable 4 provides an overview of existing mechanisms for promoting DSM and energy efficiency in Australia. Some of these mechanisms are discussed in further detail below.

Table 4 Summary of Mechanisms in Australiaa.

a As of June 1996.



Type of Activity

Implementing Organization Funding Source

Comments and Issues

Building Energy Code of Australia (BECA)

Commonwealth Department of Primary Industries and Energy (DPIE)

Federal Government

A voluntary energy code for commercial buildings, due for release in 1997.

National Home Energy Rating Scheme (NatHERS)

Initiated by Commonwealth with implementation by individual jurisdictions (States and Territories)

Federal & State Governments

A scheme for modeling and rating energy efficiency of new house construction and renovations.

Enterprise Energy Audit Program (EEAP)

Commonwealth DPIE Federal Government

A subsidy of up to 50% off the cost of an energy audit is offered to companies. Audits are required to be conducted by accredited private sector organizations.

Minimum Energy Performance Standards (MEPS)

Commonwealth DPIE Federal Government

MEPS approved for domestic refrigerators and water heaters with effect 1998. Commercial equipment presently under consideration.

Mandatory Appliance Labeling

States and Territories Federal Government

National scheme will cover energy labeling of major household appliances; refrigerators, dishwashers, air-conditioners, washing machines and clothes dryers.

DSM and Energy Efficiency Provisions in Electricity Supply Act

New South Wales Department of Energy

NSW State Government

The Act requires that retail suppliers must develop plans for DSM and energy efficiency strategies as a condition of holding a license to supply electricity. (The Act only applies within the State of New South Wales).



Type of Activity

Implementing Organization Funding Source

Comments and Issues

Co-operative Voluntary Agreements

Commonwealth Department of Environment, Sport and Territories (DEST)

Federal Government

Voluntary scheme which aims to have commerce and industry make a commitment to implement energy management in their organizations.

Sustainable Energy Fund (SEF)

Sustainable Energy Development Authority


The fund is A$65 million in size over 3 years and has the purpose of financing energy efficiency and renewable energy programs and technologies in NSW

Electricity Pricing

NSW Government Independent Pricing and Regulatory Tribunal


The Tribunal has introduced revenue regulation for electricity distribution (‘wires’) businesses and for the franchise (monopoly) component of electricity retail supply businesses.

Rebates for commercial window films, high efficiency lighting and residential solar water heaters and CFLs.

Queensland Office of Energy Management (OEM)

Queensland State Government

The OEM was set up to ensure the DSM maintains a high profile as the electricity industry in Queensland moves toward deregulation.

Various displays, information, corporate commitment and training programs

Various Government Agencies

Federal, State and Territory Governments

A variety of programs have been implemented by all governments since the early 1980s.

Commonwealth

· Building Energy Code of Australia (BECA) — A national building energy code for commercial buildings is being developed in Australia and is currently in draft stage. The Federal Government has committed to introducing


Department of Primary Industries and Energy (DPIE)


BECA, albeit on a voluntary rather than mandatory basis. It is expected that the code will be available to the building industry by 1997.

· National House Energy Rating Scheme (NatHERS) — NatHERS is a program designed to assist prospective home builders and renovators to compare the energy efficiency of home designs using an energy simulation software tool. The software tool both measures the energy efficiency of the proposed design in terms of “stars” (a 5 star house represents the highest level of efficiency) as well as providing guidance on how the rating for the proposed design could be improved. The program aims to encourage prospective home owners to select house designs with energy efficiency features such as insulation, correct orientation, double glazing and so on. A voluntary HERS, which forms the basis for the NatHERS, has been operating in the state of Victoria for some time. NatHERS is planned for implementation during 1996, but the timing and form of the scheme will be up to individual jurisdictions (primarily the States and Territories). To date, the Australian Capital Territory (ACT) has committed to mandating that all new construction meet a minimum 4 star rating while Victoria will continue to operate the scheme on a voluntary basis.

· Enterprise Energy Audit Program — This program offers a rebate of up to 50% of the cost of an energy audit for commercial and industrial participants that commission an audit by a registered energy auditor. The program has been running since the early 1990’s and since then almost eight hundred energy audits have been completed.

· Minimum Energy Performance Standards (MEPS) — MEPS for a range of domestic appliances have been agreed and will come into effect in 1998. MEPS for commercial equipment are currently under investigation. The current status of MEPS is that:

· MEPS for household refrigerators and freezers has been agreed with the levels based on a proposal from Australian manufacturers presented in 1994

· MEPS for household water heaters will also be introduced

· MEPS is unlikely to be implemented for other residential appliances, at least not in the near term.



· MEPS for commercial equipment may be introduced for electric motors, fluorescent lamp ballasts, packaged air conditioners and office equipment. MEPS for these equipment items are still being reviewed prior to possible program implementation by DPIE, although at this point in time it is too early to predict with any certainty which of these MEPS, if any, will be approved. For this reason, the possible impacts of MEPS for commercial equipment have been ignored in the analysis.

· Appliance Energy Labeling —Energy labeling of major domestic appliances such as refrigerators, freezers, dishwashers, air-conditioners, washing machines and clothes dryers has been in place in New South Wales and Victoria since the mid-1980s. Extension of this State-based scheme to a national scheme is virtually completed. Victoria has also recently introduced labeling for gas central heaters.

The Department of Environment, Sports and Territories (DEST) released in March 1995 the Greenhouse 21C document, effectively a package of measures aimed at assisting Australia meet its obligations as a signatory to the Framework Convention on Climate Change. One of these measures focuses on demand management and energy efficiency:

· Co-operative Voluntary Agreements with Commerce and Industry— The program which was launched in 1995 aims to encourage industrial and commercial companies to undertake a voluntary agreement to investigate and implement opportunities to improve energy efficiency within their operations. To date over 50 letters of intent have been signed by individual companies and industry associations.

New South Wales

Legislated energy efficiency requirements for public energy utilities have been introduced in a number of jurisdictions, one of which is the state of New South Wales (the other is Queensland). NSW has also recently announced the introduction of a Sustainable Energy Fund and is conducting investigations into innovative pricing regulation for electricity.


Department of Environment, Sport and Territories (DEST)


· Electricity Supply Act — The NSW Electricity Supply Act of 1995 now makes specific references to demand side management activities as part of the licensing requirements of electricity retailers and distributors. The Act requires that each retail supplier must, as a condition of holding a license:

· develop 1, 3 and 5 year plans for energy efficiency and demand management strategies and strategies for purchasing energy from renewable sources — including co-generation

· implement strategies to help meet national greenhouse gas reduction objectives (the Environment Protection Authority are required to audit licensees, at least every three years, on how effective these strategies have been), and

· prepare and publish annual reports on the implementation of its demand management strategies, CO2 emissions arising from the production of electricity supplied by it, and the sources of the electricity supplied by it.

· In addition, the Act requires that each electricity distributor (i.e. network owner and operator) must:

· carry out investigations into the cost-effectiveness of implementing demand management strategies as an alternative to expanding its distribution system whenever expansion of the system is required, and

· prepare and publish annual reports in relation to these investigations.

· Sustainable Energy Fund — In February 1996, the NSW Government established a Sustainable Energy Fund to reduce greenhouse gas emissions through investing in the commercialization of energy efficiency and renewable energy technologies. The Government has committed $65 million over three years to the Fund. A Sustainable Energy Development Authority (SEDA) has been established to administer the Fund. The main function of SEDA is to intervene where market failure has created barriers to the economically efficient utilization of energy efficiency technologies. The types of activities that have so far been identified for possible funding by SEDA include:




· technology commercialization programs to facilitate commercialization of sustainable energy technologies through direct investment of funds;

· market transformation programs to assist sustainable energy technologies increase their market share through providing financial assistance to purchasers of products utilizing these technologies;

· industry assistance programs to provide direct financial and other assistance to sustainable energy industries;

· information, education and training programs to support the development and use of sustainable energy technologies.

· Pricing Mechanisms — The NSW Independent Pricing and Regulatory Tribunal is a body which has been established to review and determine the maximum prices charged by NSW government agencies for certain declared government monopoly services, such as electricity. The Tribunal maintains that the major barrier to the implementation of demand management by utilities is regulatory failure. Regulation which focuses on prices rewards increases in sales. The Tribunal states that demand management should be encouraged by providing more cost-reflective pricing signals and by removing regulatory biases against demand management. The Tribunal has introduced revenue regulation for certain electricity businesses by introducing a pricing formula which effectively decouples revenues from sales volume. The purpose of revenue regulation is to control retail electricity prices and remove the bias against demand management. Revenue regulation has been applied to the revenue of distribution (network owner and operator) businesses and to the franchise (monopoly) component of retail supply businesses.

·

Queensland

Like New South Wales, Queensland has also legislated a number of energy efficiency requirements in relation to its publicly owned utilities. Queensland requires electricity corporations to set and report annually against agreed targets for energy supply efficiency and implementation of demand-side programs that are cost-effective. There is also a requirement that infrastructure planning be based on least-cost principles.


Office of Energy Management (OEM)


Queensland’s Department of Minerals and Energy recently established an Office of Energy Management with the task of delivering a range of energy efficiency rebate programs to Queensland households and businesses. Most of these programs have now been in the field for over 12 months. The main programs currently implemented include:

· Domestic Lighting Efficiency Program — Provides a A$5 rebate for each compact fluorescent lamp sold up to a maximum of three lamps per household.

· Hot Water Efficiency Program — Households qualify for up to A$80 for various water heater efficiency measures; low-flow shower rose, tank insulation wraps and adjustable thermostats

· Remote Area Power Scheme — Rebates of up to A$7,500 are provided to households in remote areas for installation of approved stand-alone power systems

· Solar Hot Water Grant Program — Provides rebates of up to A$500 for approved solar water heating systems for domestic applications

· Commercial Solar Window Film Program — Rebates are provided for installation of solar window film in commercial buildings to reduce cooling loads although rebate sizes varying depending on window area covered.

· Commercial Lighting Efficiency Program — A customized rebate is provided for a range of energy efficient lighting measures in commercial buildings such as fixtures, ballasts and lighting controls.

In addition, the OEM is also undertaking a range of programs to improve the overall efficiency of energy use within existing government owned facilities and in new construction.

Victoria

In recent times most efficiency efforts by the Victorian State Government have focused on improving the efficiency of supply side generation. For example, over the last three years the Government has spent over A$8.5 million on research in the efficient use of coal for power generation and some additional funding to support fuel cell research but very, if any, has been spent on demand side management initiatives. The State Government does operate a small office called Energy Victoria (twenty or so staff) which provides the public with a range of



energy efficiency information services. Some of the more important of these services include:

· Energy Information Center — This is a shopfront where the general public can either walk in or phone for advice and information on energy efficient home renovations, home design and appliances.

· NatHERS — Energy Victoria also operate the NatHERS software from the Energy Information Center premises. Prospective home owners can bring in their house plans and pay a fee of between A$50 and A$100 to have their plans rated under the scheme. Energy Victoria will also provide design advice on how to improve the efficiency of designs that rate poorly.

· Government Energy Services — Energy Victoria dedicate two staff members full time to assisting other government departments with implementing in-house energy management programs.

· Energy Smart Companies Campaign — The campaign is a corporate commitment program which aims to encourage companies to incorporate energy efficiency policies and practices within their own organizations while in turn providing acknowledgment and rewards to those companies that participate. To date, over 80 organizations have signed up for the program.

· Renewable Energy Assistance Program — Introduced in 1995 this scheme provides an incentive of up to A$3,000 for the installation of new remote area power systems which must include renewable energy components such as solar panels.

· Publications/Training and Seminars — Energy Victoria produce a range of education materials on energy efficient design of housing and commercial buildings and school curriculum materials for students. From time to time these also run seminars and training sessions.



Pending Proposals and Key Future Issues

During the seven year restructuring process in Australia, opportunities for demand management and energy efficiency in the restructured electricity supply industry have received varying amounts of attention. Particularly, over the past three years, during the development of the competitive electricity market in southern and eastern Australia, there has been an ongoing debate on policy and regulatory mechanisms which could be implemented to promote DSM and energy efficiency in the market. This debate has stimulated the development of several concepts for mechanisms. The concepts for mechanisms which have emerged from the debate are summarized in Table 5.

Table 5 Concepts for Mechanisms Proposed in Australia.

Category Type of Activity Implementing Organization

Funding Source

Market Structure and Pricing

Demand Bidding into the Wholesale Electricity Pool

Market Operator Pool Membership Fees

Tradeable Emission Permits for Greenhouse Gas Emissions

Environmental Regulatory Agency

Government

Mandated Retail and Network Pricing Reforms

Government N/A

Carbon Taxes Government End Users

Regulation Applied to the ESI

Revenue Cap Regulation Industry Regulator

N/A

Mandated Integrated Resource Planning by Electricity Businesses

Government ESI

Mandated Implementation of DSM and Energy Efficiency Programs by Electricity Businesses

Government ESI

DSM and Energy Efficiency Outside the ESI

Mandated DSM and Energy Efficiency Undertaken by Independent Energy Centers

Government Government or ESI

National or State DSM Auction

Government Agency or ESI

Government or ESI



So far, there have been seven major studies which have contributed to identifying concepts for mechanisms to promote DSM and energy efficiency in the Australian competitive electricity market:

· Development by the National Grid Management Council (NGMC) of a National Grid Protocol

· Preparation by the NGMC of a discussion paper on demand management in the competitive market

· Initiation of a study by the Australian and New Zealand Minerals and Energy Council (ANZMEC) into a national approach to demand management and integrated resource planning

· Commissioning by the Electricity Supply Association of Australia (ESAA) of a consultancy study on barriers to electricity utility promotion of energy efficiency

· Publication by the New South Wales Government Pricing Tribunal of a discussion paper on price regulation and demand management

· Preparation by the NGMC of recommendations for the Council of Australian Governments on demand management and energy efficiency in the competitive electricity market.

· Development of a proposal by the Australia Institute, a private sector environmental think-tank, for a tradeable emissions entitlements scheme for greenhouse gases from the New South Wales electricity industry.

1National Grid ProtocolThe NGMC’s National Grid Protocol (First Edition) was published in December 1992, but had actually been released in draft form in December 1991. This document contained the first reference to the role of demand management in the restructured ESI.

The Protocol required the evaluation of both demand-side and supply-side options on an equal basis during the competitive sourcing of new electricity generating capacity. Following publication of the Protocol, the NGMC commissioned an ad hoc working group of demand management practitioners to develop a set of practical guidelines on how the equal evaluation of demand-side and supply-side options could achieved. This working group reported in August 1993.



However, the competitive sourcing process was always seen as only an interim measure until the competitive wholesale electricity market was established. Now, with the establishment of this market proceeding apace, it is unlikely that the competitive sourcing process will ever be used. Once the market is established, the traditional centralized planning of the development of new generating capacity by State-based, government-owned utilities will be replaced by investment decisions based on market forces. It is expected that under the new market structure, decisions on investing in new capacity will be made by individual investors based on their commercial assessment of market opportunities.

Under this scenario, it would be possible for investors to examine opportunities for demand management as an alternative to investment in generation capacity. However, this is unlikely to occur for the following reasons:

· There are large differences in time scales and scales of magnitude between demand-side and supply-side options

· There are significant differences in the ability to guarantee sustained long-term performance between demand-side and supply-side options

· There is no experience in Australia in investing in demand-side options as an alternative to investment in generating capacity and therefore no track record of performance.

2NGMC Discussion Paper on Demand Management OpportunitiesAt its June 1993 meeting, the Council of Australian Governments (COAG) requested the NGMC to prepare a report on demand management. An ad hoc working group of demand management practitioners was established to prepare a discussion paper as the first stage of developing the report to COAG. After going through several drafts, the NGMC discussion paper Demand Management Opportunities in the Competitive Electricity Market was published by the NGMC in June 1994 for public comment.

Purpose

The purpose of the NGMC paper is twofold:

· To assess the potential for demand management in the future;

· To identify the issues that have to be considered in the ESI reform process so as to realize demand management opportunities.



Transition to a Competitive Market

The NGMC paper identifies some major changes likely to occur to existing demand management programs during the transition to a competitive electricity market in southern and eastern Australia:

· load reduction programs associated with customer satisfaction (e.g. energy efficiency advice and education programs) will continue, while programs which pay customers financial incentives to reduce their loads will be discontinued unless there is a clear short-term commercial benefit to the sponsoring ESI business;

· load management activities (e.g. off-peak pricing, interruptibility contracts, direct load control) may continue but will need to provide clear commercial benefits to the ESI business promoting them.

Longer Term Opportunities

The NGMC paper identifies several opportunities for demand management over the longer term, after the ESI reform process is complete.

In the wholesale market, it is possible that a process for bidding planned load reductions into the wholesale pool (‘demand bidding’) by distributors and large customers will be established. [The establishment of such a process is currently being investigated by the NGMC.] Generators may choose to carry out demand management as a new business activity separate from the generation business. Generators may also use demand management to support the generation business by reducing their greenhouse gas emissions.

In the retail market, retail suppliers may become either low cost commodity providers or energy service companies providing a range of energy services. If they choose to become commodity providers, retail suppliers will have strong cost drivers to use demand management to minimize their costs of energy purchases from the wholesale pool. However, the ability of retail suppliers to share in the benefits which derive from demand-side investments will be limited under this scenario. If retail suppliers focus on the efficient delivery of energy services, electricity trading will become only a part of their business. Under this scenario, demand management will be an essential part of the retail energy market, with active involvement of the retail suppliers in their customers’ businesses and in the management of their energy use.



In the network (‘wires’) businesses, the cost drivers will encourage the continuation of short term load control activities. However, to implement load control programs (e.g. off-peak water heaters), the network owners will be dependent on the retail suppliers for contact with customers. The use of demand management to defer network augmentation will be highly dependent on the incentives given to network owners to invest in the network. If the network service pricing formula simply allows network owners to pass through their costs to retail suppliers and customers, there will be no incentive to use demand management to defer system augmentation.

Pricing Regulation as a Barrier to Energy Efficiency

The NGMC paper states that, currently, short term loss of revenue is a major barrier to the promotion of energy efficiency by utilities in Australia. This barrier arises because of the interaction between the type of system currently used to regulate electricity prices and the particular financial characteristics of the electricity utility business. The barrier can be overcome by the implementation of a range of mechanisms which increase the commercial viability of energy efficiency to utilities. The paper identifies three mechanisms:

· An energy efficiency component of a Pool Membership Fee, the revenue from which is used to create an ESI energy efficiency fund;

· A cost pass-through mechanism which allows retail electricity prices to rise to accommodate the costs of energy efficiency programs;

· A revenue regulation mechanism which decouples utility profit margin from electricity sales volume.

3ANZMEC Study of Demand Management and Integrated Resource PlanningIn December 1992, the Council of Australian Governments endorsed the National Greenhouse Response Strategy (NGRS) and the National Strategy for Ecologically Sustainable Development. The NGRS contains prioritized response measures for Governments to carry out. Response measures outlined in the first phase of the Strategy are generally of a ‘no regrets’ and ‘insurance’ nature, and offer benefits in addition to those associated with ameliorating climate change.

The Australian and New Zealand Minerals and Energy Council (ANZMEC) comprises State and Federal Ministers concerned with minerals and energy issues. ANZMEC has responsibility for



a number of the response measures identified in the NGRS. One of ANZMEC’s priority measure is “to examine the basis for a national approach to demand management and least-cost planning in the energy sector, with particular reference to definitions, principles, scope and methods”.

In mid-1993, ANZMEC established a management committee for a study of a national approach to demand management and least-cost planning. As a first phase of the study, the committee decided to investigate demand management and integrated resource planning in the proposed competitive electricity market. (The committee preferred to use the term ‘integrated resource planning’ instead of ‘least-cost planning’). Following the completion of this first phase, the committee will broaden its investigations to cover other energy sectors.

The committee commissioned five discussion papers from consultants based in the United States, the United Kingdom, Norway and Australia. Several of these consultants were demand management practitioners or regulators of electricity supply industries who had a special interest in promoting demand management and energy efficiency through the regulatory process. The consultants were asked to outline mechanisms which could be implemented in the proposed competitive electricity market in Australia to promote the implementation of demand management and energy efficiency.

Following receipt of the five commissioned papers, the committee prepared its own paper drawing on material from the five papers. The committee’s draft report “Least Cost Energy Services for Australia” was completed in May 1994. In August 1994, ANZMEC referred the draft report to the NGMC for consideration. In April 1995, ANZMEC agreed to publicly release a final report. This version was unchanged from the May 1994 draft.

The committee concluded that integrated resource planning and demand management applied in an appropriate regulatory framework are compatible with the proposed Australian competitive electricity market and will enhance the benefits to customers through the introduction of economic energy efficiency.

The committee’s report identifies ten mechanisms which could be implemented in Australia to achieve the outcomes of integrated resource planning and the implementation of demand management. These mechanisms are as follows:



1. Retail and network pricing reforms

2. Demand bidding into the wholesale pool

3. Carbon taxes

4. Revenue cap regulation applied to electricity distributors

5. Integrated resource planning applied to utilities

6. Mandatory utility demand management

7. Demand management undertaken by independent energy centers

8. National or state demand management auction

9. Establishment of an independent energy services industry

10. Energy efficiency standards.

The committee assessed each of the mechanisms in terms of their effectiveness in overcoming market barriers to demand management and whether they satisfied key implementation criteria. The committee considered that carbon taxes would not be an effective mechanism to achieve energy efficiency in the Australian electricity sector.

With this exception, the committee identified specific roles for each of the remaining nine mechanisms in contributing to an overall strategy to achieve the outcomes of integrated resource planning and the implementation of demand management in the Australian competitive electricity market.

Briefly, the committee proposed that in the early stages of the restructured electricity market, the optimum level of cost-effective demand management would be achieved by establishing a framework of incentive regulation for the franchise retail market using a revenue cap to decouple utility revenue from electricity sales volumes. This would provide electricity distributors with commercial incentives to undertake demand management, resulting in the level of cost-effective demand management being determined on a commercial basis by the distributors.


Pricing Mechanisms and Reforms

Regulatory Mechanisms Applied to Utilities

Demand Management Applied Externally to Utilities Standards


As the retail market is opened to competition, the committee acknowledged that revenue capping will no longer be applicable. Alternative mechanisms such as demand management auctions and possibly mandatory requirements for demand management could be introduced. Other mechanisms, such as independent energy centers, integrated resource planning applied to distributors, and energy efficiency standards would also have a valuable contribution to make as part of an ongoing strategy.

4ESAA Consultancy Study on Barriers to Utility Promotion of Energy EfficiencyThe Electricity Supply Association of Australia (ESAA) is an industry association which has as members virtually all the 50 or so major electricity utilities in Australia. In September 1993, the Board of the ESAA agreed to commission a consultancy study to examine alternative mechanisms which may be incorporated within the structure of the Australian competitive electricity market to ensure that promotion of end-use energy efficiency by an electricity utility will not financially disadvantage that utility.

The ESAA study was therefore similar to the ANZMEC study but more limited in scope because it focused only on mechanisms directly applicable to utilities.

The consultantsa identified five basic mechanisms which could be used to ensure that profit-motivated utilities in Australia pursue end-use energy efficiency without financially disadvantaging the individual utility. These mechanisms are:

1. Regulatory approval for recovery of the financial impacts on utilities of energy efficiency programs;

2. Decoupling of utility revenue from electricity sales volumes;

3. Establishment of a levy on the ESI to fund end-use energy efficiency initiatives;

4. Expansion of the competitive electricity market to promote energy efficiency, particularly by more efficient pricing of electricity;

5. Establishment of energy services contracts by utilities.

The consultants concluded that:

a The consultants selected for the ESAA study comprised a large accountancy firm, Ernst & Young, teamed with a merchant bank, HRL Morrison and Co, together with a specialist demand management consultancy firm, SRC International. The consultants’ report was completed in April 1994.



· revenue decoupling plus cost recovery, and

· the end-use energy efficiency levy,

are the prime candidates for further consideration, particularly in terms of their detailed application in each Australian State and Territory.

5Government Pricing Tribunal Paper on Price Regulation and Demand ManagementThe Government Pricing Tribunal of New South Wales (now called the Independent Pricing and Regulatory Tribunal)is an independent body which was established to review and determine the maximum prices charged by New South Wales State government agencies for certain declared government monopoly services. Electricity is one of the services for which the Tribunal determines prices.

When making price determinations and recommendations, the Tribunal is required to give consideration to a number of issues, including protection of the environment. This requirement has led the Tribunal to investigate the interaction between price regulation and demand management. In September 1994, the Tribunal published a discussion paper on this issue. A further publication “Revenue Regulation for Electricity Distributors: Questions and Answers” was released in February 1995.

The Tribunal maintains that the major barrier to the implementation of demand management (i.e. energy efficiency) by utilities is regulatory failure. Regulation which focuses on prices rewards increases in sales and may discourage the ESI from marketing energy management services on a commercial basis.

The Tribunal states that demand management should be encouraged firstly by providing more cost-reflective pricing signals and secondly by removing regulatory biases against demand management. The Tribunal proposes to introduce revenue regulation to control retail electricity prices and remove the bias against demand management.

Under revenue regulation of retail electricity prices, a portion of the total revenue of a utility is set each year by the regulator at a particular dollar figure calculated according to an established formula. Provided the regulated portion of revenue remains within this ‘cap’, the utility is free to set the structure and levels of retail prices in any way it chooses. Any over- or under-collection of revenue in one year is corrected in determining the revenue cap for the following year. Utility profits under the



revenue cap can be the same as under other forms of regulation although they may be less volatile. Dividends to shareholders (i.e. governments) can be maintained.

Revenue regulation can be used to ‘decouple’ revenue from sales volume, though this is not necessarily a result of this type of regulation. This decoupling is usually achieved by setting the revenue cap as a dollar value per customer. This is in contrast to price capping which establishes a cents per kilowatt-hour value. The formula used for calculating the allowable revenue can be set to achieve various percentages of decoupling from zero to 100 per cent. With 100 per cent decoupling, increased sales above the forecast volume result in no additional revenue to the utility in that portion of total revenue subject to the cap.

Revenue regulation with decoupling may be used to overcome the financial disadvantage faced by those utilities which choose to promote energy efficiency. Without decoupling, these utilities are disadvantaged through the revenue they forego by reducing their sales volume through promoting energy efficiency. Decoupling does reduce this financial disadvantage. However, the establishment of a revenue cap with 100 per cent decoupling may also reduce the incentive for utilities to promote fuel substitution from other energy forms (such as gas) to electricity. This may adversely affect those utility businesses which are based solely on supplying electricity as a commodity, particularly generation businesses.

Forms of revenue regulation with decoupling have been applied in some US States since the mid-1980s to encourage utilities to promote energy efficiency. Over time, those states which have implemented revenue regulation have moved progressively towards 100 per cent decoupling, sometimes also with additional financial incentives paid to those utilities which implement energy efficiency customer programs.

In July 1993, the regulator for the ESI in England and Wales announced a revised price control formula to apply from 1 April 1994. This formula introduced revenue regulation for the retail energy supply businesses of the distributors—the 12 Regional Electricity Companies (RECs). The RECs’ energy supply businesses can continue to pass through to retail customers all their costs of purchasing bulk electricity. The new formula is expected to result in approximately 80 per cent of the revenue from the retail energy supply businesses being decoupled from sales volumes.

In Australia, a form of revenue regulation with decoupling applied to retail prices was first proposed in early 1993. This was called ‘margin regulation’ and was included as one of three options for overcoming barriers to energy efficiency outlined in a



paper prepared for the ESAA Demand Management and Energy Efficiency Committee.

In New South Wales, the Tribunal proposed in mid-1995 that revenue regulation should apply to the franchise component of the retail market and to the distribution ‘wires’ business. The detailed revenue regulation formula proposed by the Tribunal has the following form:

R = a + brNr + bcNc + biNi + cM + dLwhere

R is the annual allowable revenue for a utility set by the Tribunal

N is the actual number of customers served by the utility in the residential (Nr), commercial (Nc) and industrial (Ni) sectors

M is the actual number of megawatt-hours sold per annum by the utility

L is the actual length in kilometres of transmission and distribution lines owned by the utility

b is the allowable number of dollars per customer in the residential (br), commercial (bc) and industrial (bi) sectors as set by the Tribunal; this term will be the same throughout New South Wales

c is the allowable number of dollars per megawatt-hour sold as set by the Tribunal; this term will be the same throughout New South Wales

d is the allowable number of dollars per kilometer of transmission and distribution line as set by the Tribunal; this term will be the same throughout New South Wales

a is a residual term capturing other costs; this term will be set specifically for each utility

Since this formula includes a term for allowable dollars per megawatt-hour sold, it does not achieve 100% decoupling of revenue from sales volume. The actual level of decoupling will depend on the value of c set by the Tribunal. However, application of the formula to New South Wales distribution



utilities is expected by the Tribunal to reduce the bias against implementation of demand management by distributors.

6NGMC RecommendationsFollowing the receipt of public submissions on their discussion paper on demand management, the NGMC established an ad hoc working group of demand management practitioners and other interested parties, including an ESI regulator and an environmental group. The role of this working group was to review both the submissions on the NGMC paper and the recommendations of the ANZMEC IRP Committee report (which had been referred to the NGMC by ANZMEC), and to develop recommendations for the Council of Australian Governments on demand management and energy efficiency in the competitive electricity market.

The working group produced several drafts of recommendations which were reviewed by the NGMC members and the various jurisdictions they represent. The NGMC also carried out a final revision of the recommendations. The recommendations were finalized in February 1995 and were published by the NGMC in April in the document Demand Management and Energy Efficiency in the Competitive Electricity Market.

The document is more concerned with establishing a facilitative environment for demand management and energy efficiency rather than with specific mechanisms applicable to the structure and operation of the Australian competitive electricity market. In relation to the operation of the market, the document acknowledges that the current NGMC market design enables market participants to forward bid dispatchable load into the pool. However, the document concludes that much more work is required to expand the conceptual framework to a level where participants understand the practical implementation of this demand bidding process.

The document identifies three key actions which are required to build on the benefits of competition in the Australian ESI and ensure that energy services are delivered to end-use customers at least cost:

· Develop the competitive electricity market;

· Establish drivers similar to the effects of competition in the monopoly elements of the ESI;

· Carry out ongoing government oversight and review.

Nine recommendations were developed to ensure that these actions are carried out.



In relation to the competitive electricity market, the recommendations were concerned with:

· achieving cost-reflective prices through:

· Ensuring that prices in the spot market are not artificially constrained;

· Facilitating demand bidding into the wholesale pool;

· Encouraging the development of a liquid long term tradeable forward market.

· Increasing customer choice through:

· Ensuring that there are no barriers to involvement in the provision of energy efficiency services by commercial businesses;

· Supporting the development of a robust competitive energy efficiency services industry through continuing existing programs and initiating new programs;

· Expediting the development and implementation of energy labeling and minimum energy performance standards;

· Facilitating co-operation between ESI participants to enable delivery of energy efficiency programs.

· Ensuring that governments implement equivalent reforms across all energy-related sectors.

In relation to establishing competitive drivers, the recommendations were concerned with:

· facilitating the achievement of least cost outcomes in monopoly ESI businesses through:

· Implementing an appropriate mix of price and revenue regulation;

· Considering the use of Community Service Obligation payments;

· Using benchmarked industry costs in establishing revenue requirements.



· Ensuring that prices to users of the network reflect network costs.

In relation to carrying out government oversight and review, the recommendation was that ANZMEC regularly assess national energy production and use against the criterion of achieving cost-effective and competitive delivery of energy services and that Australian governments use the results of these assessments to provide a basis for reviewing policy, programs and regulation.

7Australia Institute Proposal for a Tradeable Emissions Entitlements SchemeThe Australia Institute is a private sector environmental think-tank which in late 1995 developed a proposal for a tradeable emissions entitlements scheme for greenhouse gases from the New South Wales electricity industry. This proposal has been submitted to the New South Wales Government. The New South Wales Environmental Protection Authority is currently considering the proposal.

The objective of the scheme is to define specific enforceable targets for reductions in greenhouse gas emissions while at the same time ensuring that emission reductions are brought about at the lowest economic cost. Under the scheme, the New South Wales Government would set targets for greenhouse gas emissions by retail suppliers of electricity. The Government would then issue permits that carry entitlements to emit a specific volume of greenhouse gases over a specific period. This would set an absolute upper limit on allowable emissions. Retail suppliers would be allowed to sell electricity only up to the amount permitted by their entitlements to emit greenhouse gases.

Over time, the Government could reduce the number of permits or reduce the entitlement volume of emissions for each permit. This would achieve an ongoing reduction in greenhouse gas emissions.

Greenhouse gas emission permits would be tradeable, i.e. they could be bought and sold. This is intended to introduce flexibility into the emissions reduction program because not every retail supplier is required to reduce emissions at the same rate. Some retailers could achieve faster reductions through purchasing more electricity from lower emitting sources and profit by selling excess entitlements. Others could reduce emissions more slowly but at the cost of purchasing more entitlements.



The cost of emission entitlements would be treated in the same way as other business costs. Depending on how many permits were issued and how quickly their number was reduced over time, the cost of acquiring entitlements would form a significant part of a retail supplier’s costs. This would force retailers to choose carefully their sources of supply from among high emitting sources (coal-fired power stations), moderate emitters (gas-fired generation) and low to zero emitters (renewable generation, DSM and energy efficiency).

8Summary of Policy ConclusionsThe seven major activities which have been completed during the policy development process have been carried out by widely different organizations and groups of people. However, there are a number of common themes and conclusions which run through all the policy documents. The common policy conclusions are summarized below.

· A well-functioning competitive electricity market in southern and eastern Australia will:

· Achieve cost-reflective pricing to encourage the efficient use of electricity by customers;

· Separate the retail sale of electricity and electricity generation into different businesses, thereby allowing retailers to offer energy efficiency services as well as electricity sales;

· Enable customers to choose between electricity suppliers on the basis of the services they offer (including energy efficiency services) as well as price.

· Achieving true competition between demand-side and supply-side options will require action to encourage the establishment of a robust, competitive energy services industry in Australia.

· Achieving the efficient delivery of demand-side options will require some collaboration between participants in the competitive electricity market.

· Enabling monopoly ESI businesses to carry out energy efficiency programs will require some changes to the current regulatory structures.

· Maximum take-up of all cost-effective energy efficiency opportunities will require continuing government action to progress energy labeling and minimum energy



performance standards for appliances, energy equipment and buildings.

· Improving energy efficiency across all energy forms, rather than just in relation to electricity use, will require governments to implement equivalent reforms to those in the electricity sector across all energy-related sectors.

References

1Key Organizations and Contact PersonsSeveral individuals were interviewed from each of the utilities represented in the write-up. In each case, however, one individual (generally from the demand-side group) served as the co-ordinator of the interview process. The name and contact details of these co-ordinators are presented below. They can be contacted for further information on any of the topics discussed in the write-up, including referral to the other individuals within their organizations who participated in the interviews.

New South Wales:

Dr. David Crossley formerly with Pacific Power, now with the Electricity Reform Task Force in the New South Wales Treasury and also with the New South Wales Sustainable Energy Development Authority.

Phone: (+61) 2 228 5012; Fax: (+61) 2 228 3173

Mr. Neil Gordon, Energy Australia (former name Sydney Electricity)

Phone: (+61) 2 269 4971; Fax: (+61) 2 269 4955

Mr. John Adams, NorthPower (former name Northern Rivers Electricity)

Phone: (+61) 66 42 9140; Fax: (+61) 66 42 2670

Victoria:

Mr. Gary Gavin, CitiPower

Phone: (+61) 39 658 9062

Queensland:

Mr. John Young, Queensland Transmission and Supply Corporation



Phone: (+61) 7 3228 7659; Fax: (+61) 7 3228 7698

Western Australia:

Mr. Craig Hosking, Western PowerPhone: (+61) 9 326 4890; Fax: (+61) 9 3264600

2BibliographyANZMEC IRP Management Committee Least Cost Energy Services for Australia April 1994

David Crossley and Neil Gordon Pricing Regulation to Promote Energy Efficiency in Australia ESAA Seminar on Demand Management, Sydney, June 1993

David Crossley “DSM and Energy Efficiency in the Australian competitive Electricity market” Paper presented at the 4th International Energy Efficiency and DSM Conference, Berlin, 10-12 October 1995.

David Crossley Environmental License Conditions in the Electricity Industry Reform Legislation in New South Wales, Australia Electricity Reform Taskforce, NSW Treasury February 1996.

Ernst & Young, HRL Morrison and Co, SRC International Overcoming Barriers to Electricity Utility Promotion of End-Use Energy Efficiency: A Report to the ESAA Demand Management and Energy Efficiency Committee April 1994 (unpublished)

Government Pricing Tribunal of New South Wales Price Regulation and Demand Management (Discussion paper No 7) September 1994

Government Pricing Tribunal of New South Wales Revenue Regulation for Electricity Distributors: Questions and Answers February 1995

Clive Hamilton A Tradeable Emissions Entitlements Scheme for Greenhouse Gases from the NSW Electricity Industry Australia Institute December 1995

Independent Pricing and Regulatory Tribunal of New South Wales Electricity Prices March 1996.

National Grid Management Council National Grid Protocol: First Issue December 1992

National Grid Management Council Demand Management Opportunities in the Competitive Electricity Market (2 volumes) June 1994



National Grid Management Council Empowering the Market: National Electricity Reform for Australia December 1994

National Grid Management Council Report to the Council of Australian Governments: Demand Management and Energy Efficiency in the Competitive Electricity Market February 1995.

Sustainable Energy Development Authority Draft Corporate Plan 1997-2000 April 1996.

Sustainable Energy Fund Working Group Final Report Electricity Reform Taskforce November 1995



3FINLAND

Overview

The new Electricity Market Act

The new electricity market act (effective June 1, 1995) includes the following features:

· Third party access (TPA) for customers above 500 kW has been phased in by November, 1995.a After January 1, 1997, TPA extended to all customers

· Distribution companies have been divided at least on an accounting basis into sales and distribution activities since 1st of January 1996 (unbundling). The companies have lost their franchise right in sales and have to compete on equal terms with other suppliers

· Generation and electricity trade will be subject to competition, while transmission and distribution will remain natural regulated monopolies

· Transport charge will be based upon a “point tariff” (e.g., vary only by time and voltage level and is not dependent on transportation distance)

· The state authority (Electricity Market Authority) will supervise but not regulate transport tariffs (i.e., fees for transmission and distribution) under the conditions of reliability and economic efficiency. The responsibility also includes protecting the interest of small (franchise) customers during the transition period and giving licenses to monopoly network owners

Policy objectives behind restructuring

Finland has decided to reform its power sector in order to ensure a well functioning electricity system in the future. This includes:

· be consistent with Swedish and Norwegian reforms

a Since 500 kW refers to one out-take point, the market is in reality opened up for approximately 2000 end-use customers.



· to make sure that the Finnish electricity sector remains competitive

· to avoid cross-subsidization

· to respond to pressure from customers to introduce competition

· to ensure environmental quality and adequate fuel supply.

Introducing competition is viewed as a necessary step towards keeping the traditionally high efficiency in the Finnish power sector, as Europe and Scandinavia were moving towards an internal market for power trade. There has also been poor experience with central planning committee. There also appear to be clear economic and technical benefits from co-ordinating a thermal dominated system with the Norwegian hydro and Swedish hydro/nuclear electricity dominated power systems. At the same time also other changes were needed to the current legislation and the timing was therefore suitable to introduce the current changes.


1Power Supply and Demand Electricity consumption is expected to grow from the present consumption of about 69 TWh to about 90-100 TWh by 2010 depending on the conservation measures and economical development. Net supply of 69 TWh in 1995 was divided as follows: hydro 19 %, nuclear 26 %, CHP 30 % (in industry 14 and in district heating 16 %), thermal condensing 13 % and net imports 12 %. Total consumption was accordingly in industry 54 %, in households 21 %, in agriculture 4 %, in service sector 11 % and in public sector 6 %. Total losses were 4 %.

2Projected Needs for New Energy Resources and CapacityAccording to the estimate of the Ministry of Trade and Industry (MTI) in 1993, about 2000 MW of new capacity should have been needed by the year 2000 and about 1500-3500 MW more by 2010 depending on the growth of the demand and on the amount of imported electricity. Most of the new capacity needed by the year 2000 will be met by CHP and other plants under construction.



Russia currently supplies power to Finland under a power purchase agreement with state owned power company IVO that is due to expire in 1999. Upon expiration, it is not clear that the purchase agreement will be renewed, forcing power companies to reassess their resource options. The options are somewhat limited given various constraints on supply: a moratorium on nuclear power, limited ability to increase the use of natural gas due to pipeline constraints, and limited potential for coal given its emissions and high taxation. Industrially owned power company PVO has already agreed on the electricity import from Russia. Imports from Norway and Sweden are also expected to increase due to the competition in Nordic electricity market and demand-side resources are likely to become more economic. District heating systems supply heat from CHP plants to Helsinki and several other cities, but the long-term potential for additional district heating applications is limited due to the fact that district heating already covers all the most attractive areas.

3Industry Structure and OwnershipThe Finnish electricity supply industry (ESI) has more than 370 power generation stations owned by power companies, local energy utilities and industry. About 120 enterprises are involved in the production of electricity. Large industrial companies, both state and privately owned, play an important role in the ESI. Industry either own factory co-generation or hold shares in generation companies (and also in transmission company). The two largest power companies are IVO (publicly owned) and PVO (primarily industry owned). In Finland there has always been competition in generation. Marketing of electricity is dominated by IVO and PVO, which handle most wholesale transactions, but also sell directly to bulk customers. Both IVO and PVO account for about 40 % of the domestic generation of electricity. Rest 20 % is mainly generated by local utilities.

The deregulation of the electricity market has resulted in IVO separating into a production, engineering and transmission companies. The new transmission company (IVS) is now competing with the industry owned equivalent (TVS) for power transmission to bulk customers. Both companies have their own transmission lines in the interconnected network. At the moment these two companies as well as the Ministry of Trade and Industry have agreed to establish of one new transmission company in the beginning of 1997. IVO has also bought some distribution companies.

Transmission and distribution networks are opened to all market participants. There are about 115 distribution utilities in Finland (and the number is decreasing) — three-quarters of these are owned by local authorities, the rest by industry and private



investors. There are many mergers between distributors and acquisitions by producers occurring at rapid pace. The number of utilities is likely to be significantly lower in the future.

4Power MarketFinland has had two separate high voltage grids more than ten years and industry, local utilities and IVO have operated their individual plants mainly according to their own needs although IVO control center has been co-ordinating the whole system. This will change from the merging into one transmission company in the beginning of 1997.

A power marketplace (El-Ex), a subsidiary to “Finnish Options Market” (SOM), is scheduled to be operative from Summer 1996. The marketplace will provide a possibility for participants to perform continuos trading and all bids are closed 2 hours before delivery. El-Ex offers several products including bids as far up to one year into the future. All bids are currently linked to physical delivery, and each delivery is guaranteed by an open deliverer on a case-by-case basis. The marketplace currently has 32 members (primarily power companies), grouped into A, B and C members depending upon information link and access to trade. Continuos trading is viewed as more preferable in a CHP and thermal power dominated system where the production conditions and marginal generation costs change rapidly because of a large number of small and heterogeneous generation units on the margin.

The power market is likely to move towards offering pure financial trade and provide access to a larger number of players — as the access is opened up to more players in the market. Common Nordic marketplace is under discussion and it is probable that it will be established in near future (in 1997?).

5Industry Regulation

Ministry of Trade and Industry

Authorities in Finland have the belief that the role of government sector should be as limited as possible. There has historically been no price control and very little government planning for power sector development in 15 years. Before that there was during a certain period a national planning process for generation and transmission co-ordinated by the Ministry, but it was rejected being inefficient and bureaucratic. In the legislation, prices are stated to “be reasonable” and complaints can be made to Electricity Market Authority or to the Anti Trust Authority. It is likely that more guidelines will be needed as to



how costs should be calculated and a practice in handling complaints must be established.

Ministry has a very limited staff to monitor the power sector. The power sector in Finland has traditionally had an high efficiency, and to maintain this, the current policy relies heavily on market forces to achieve an increased economic efficiency in the power sector. The main role of the Ministry is to promote competition and ensure that there are no barriers for free energy market.

There is further a liberal attitude towards licensing of new power stations and import/export of power — i.e., anyone commercially capable is in principle permitted to build new generation, purchase existing generation or any energy business, or to import/export power. The nuclear power plant is an exception which should be accepted in the Parliament. The Ministry will be carefully evaluating large generating companies purchases of distribution companies in Finland, to avoid further vertical integration. Further will ownership of the national grid be carefully watched.

Electricity Market Authority

As part of the reform a separate Electricity Market Authority (EMA) has been established. EMA has the following key objectives:

· Promote the development of an effective power market — this includes to make available information regarding prices and customer choices between power suppliers

· Control the monopoly (network) business — this includes to monitor possible cross subsidies between network and supply functions and to authorize distribution licenses (currently 121 licenses)a

The utility regulator will require utilities to publish transmission prices, terms, and pricing criteria and will require that pricing be based on costs incurred to provide service. Thus a key tool for the regulator is to make available information regarding the cost structure, fees charged for distribution in different utilities and how these are calculated. These currently varies extensively. EMA does not have any authority to remove or prevent utility “over investment”, but can remove from the distribution charges any identified supply related charges. EMA

a The Office of Free Competitionanti trust authority will handle issues related to illegal collaboration between suppliers or prevention of access to the market, etc. There is a close collaboration between EMA and the Office of Free Competitionanti trust authority, with a meeting every week.



can only “punish” irregularities through the license approval process.

It is likely that network charge variations between distributors will be allowed and that some convergence will occur as a result of (1) public pressure from making charges available and (2) efficiency gains in the distribution sector. Discussion on the performance based regulation has been started.


1Energy conservation policyThe current objectives, as set by the government in its energy savings program in 1992, are to improve the energy efficiency from 1990 to 2005 by 10 % in domestic and public building heating, by 15% in domestic and public sector electricity consumption and by 10% in industry and traffic. An overview of current mechanisms based on 1992 energy saving program is provided below.

3Table 1 Overview of mechanisms.

Type of Implementation

Implementing Organization

Funding Comments and Issues

Negotiated Agreements

MTI and energy actors

Little or no financial transfer involved

Agreements are negotiated between government and actors to achieve specific energy efficiency targets. Main target groups have been process industry (pulp and paper, basic metal) and municipal sector

Certified Energy Audits

MOTIVA and Independent energy audit providers

Governmental support, max. 50 %

Customer requests energy audit.

MOTIVA has facilitated training of auditors, provides a format for performing audits and approves audits upon which usually 30-40% of the audit cost is paid by government.

Support for investments of energy conservation

Industrial, private and municipal energy users

Governmental support on average 19,5 %

85 % from the support to the investments in industry






Support for R&D MTI Energy Department, Technology Development Center (TEKES) since 1995

Governmental funding (support, loans)

Support for research organizations usually 50 - 60 % and for industry less than 50 %

Information on energy saving

mainly MOTIVA Governmental funding

A new program for the promotion of energy conservation has been under preparation, and the objectives of that will be to reduce the energy consumption growth by 10 % in electricity and 15 % in fuels until the year 2010 compared to the situation without the conservation program. In primary energy this means the reduction of about 5 million toe in 2010 and in electricity generation the reduction of about 2000 MW in generation capacity.

2Public service responsibility As restructuring is implemented and competition is introduced, new pressures are placed on the utilities. It is much more difficult to cause an alignment of the social and commercial interests. Further, the social compact between the utilities and government is weakened as the franchise monopoly is removed from segments of the power industry. It may be possible to impose a responsibility for promoting energy efficiency on the portions of the utility that retain a franchised monopoly.

Paragraph one in the energy act states that energy companies operating in the power market are “responsible for providing their customers with services relating to the supply of electricity and for promoting the electricity efficiency and conservation in their own business operations as well as in those of their customers.” No mandatory requirements accompanies the current interpretation of this text.

The public service responsibility includes that all eligible customers should be provided access to the electricity network at a reasonable cost. In Finland, at the moment there are no official obligations for utilities to promote energy efficiency nor possibilities to collect extra money for that purpose through tariffs.

The Ministry of Trade and Industry does not believe that residential customers will pay a significantly higher price than



before nor that they will be discriminated relative to larger customers which are likely to play a more active role in the market providing that small customers have real access to market. There is also the belief that the market will contribute to reduce the price band between customers in different geographical areas significantly.

3Funding SourcesThe Finnish Ministry of Trade and Industry has stateda that economic instruments, taxes and funding are needed to perform the appropriate level of energy efficiency. Energy and environmental taxes should be internationally harmonized. In the development of energy taxation, the whole taxation structure should be reviewed with the purpose of introducing incentives to encourage energy efficiency. The Ministry of Trade and Industry further states that state funding available should mainly be targeted to the development and use of new energy efficient technology, the support of energy conservation agreements, energy efficiency improvements of buildings and information activities supporting other conservation measures.

At the moment (1995) the state funding (in millions FIM) to energy conservation was as given in Table 2. The state funding is aimed to be keep at approximately the current level also in the near future.

4Table 2 Funding to energy efficiency in Finland (1995)

Funding (million FIM)

Research and product development 60

Commercialization of new technology 10

Funding for energy audits 10

Information 9

Support for building renovations 50

Support for energy conservation agreements 1

TOTAL 140

a Report of the Energy Conservation Committee, October 1995.



In the original text of the energy act, an energy efficiency levy was proposed to be added to the distribution charge and earmarked for carrying out DSM and energy efficiency. That was, however, rejected in the Parliament.

4Intervention Method

Regulatory and financial measures

The Finnish Ministry of Trade and Industry has stateda that regulatory measures are needed to add momentum to energy efficiency activities. This would mean a number of measures in all consumption sectors. Examples of different types of measures include

· More stringent building regulations

· Regular energy audits in industry and buildings

· Individual metering of energy and hot water of consumers in new flat houses

· Energy labeling for appliances and vehicles

· Energy efficiency standards and norms

In spite of regulatory measures also other efforts for promoting energy efficiency will continue including

· Energy taxes

· Financial support for building renovation etc.

· Support for R&D and commercialization of new technology

· Voluntary (negotiated) agreements on conservation

· Information

a Report of the Energy Conservation Committee, October 1995.


DSM levy on distribution network


5Intervening Organizations

MOTIVA

In Finland, as a result of energy conservation program of 1992, a temporary, governmental-financed center (called MOTIVA) has been established to promote energy efficiency with activities in areas of information, energy audits and energy efficient technologies in all sectors of energy-use. New energy conservation program aims to continue the work of MOTIVA on permanent-base.

In spite of that, co-operation is required between public sector, companies and operators of the energy sector. A successful implementation would require sufficient resources in terms of professional human and other resources to be dedicated to the promotion of energy conservation in both public and private sectors. A lot of attention should be devoted to the organization of the implementation and evaluation of the new conservation program.

MOTIVA feels that far too few project are currently performed jointly with utilities and would like to investigate mechanisms to increase this activity. Proprietary issues have prevented large scale activities, and there is the belief that an early stage of competition will primarily focus on price as the key competition factor and as the market matures there will be more focus on products and services.

MOTIVA see a potential role for demand bidding and ESCO stimulation. However, some third party involvement is believed necessary to encourage ESCO formation.

Other public organizations

The Ministry of Trade and Industry is key ministry in the realization and co-ordination of public efforts for promoting energy efficiency. This will be done in close co-operation with the Ministry of Finance (taxes, state budget) and with the Ministry of Environment which is key position in questions of building regulations and promoting renovation of exiting buildings for.

Technology Development Center (TEKES) under the Ministry of Trade and Industry is the key organization in the development of new technologies.



Pending Proposals for Mechanisms and key Future Issues

1Negotiated agreementsIn spite of regulatory measures, the energy conservation can be promoted also through voluntary energy conservation agreements, which state would sign with industry and other energy users as well as with energy producers and suppliers. Efforts will be made to develop these agreement to a tool, which is as effective as regulatory measures. These agreement would promote especially the introduction and use of new technology in both energy production and energy use, energy auditing and feedback information given by energy suppliers to consumers.

2Stimulating the growth of a viable ESCO IndustryGovernment may play a role in stimulating the growth of a viable energy service industry. Currently other policy issues appear as more important to the government than energy efficiency, e.g., stimulating employment, but these can be combined and used to promote effective strategies. Overcoming financial barriers — e.g., through providing a fund for specific energy efficiency projects to gain access to reasonable financing or bank guarantees — also seems like an attractive strategy for the future.

3Demand bidding into the wholesale power poolAs the market develops to better reflect true costs of electricity (and risk of cost variations) much larger flexibility will be developed by the market actors to better adapt to changing conditions. ToU rates, dynamic pricing and risk for price variations will force investments in instruments to take advantage of this, even if energy prices are expected to increase in real terms. Demand bidding is historically done in an avoided cost context (where customers invest in equipment to enable them to follow variations in demand charges). In the future demand is likely to have a market value where customers can have a commercial interest in bidding un-used capacity into the pool. Establishing functional trading relations for this demand trading to take place is critical to realize the economic benefits.



References

1Key Organizations and Contact PersonsMr. Juha Kekkonen, Director of Energy Market Division, Ministry of Trade and Industry, Phone: + 358 0 1605270, Fax: + 358 0 160 2695a

Mr. Arto Lepistö, Counsel, Ministry of Trade and Industry, Energy Department, Phone + 358 0 160 4808, Fax: + 358 0 160 2695

Mr. Pentti Puhakka, Senior Advisor of the Energy Efficiency Division, Ministry of Trade and Industry, Phone: + 350 8 160 4813, Fax: + 358 0 160 2695

Mr. Seppo Silvonen, Director, MOTIVA, Phone: +358 0 456 9091, Fax: + 350 0 456 7007

Mr. Reijo Mäki, Director, Electricity Market Authority, Phone + 358 0 622 0360, Fax: +358 0 622 1911

Mr. Eero Pere, Director, Electricity Market, Association of Finnish Electric Utilities, Phone: + 358 0 4030 6402, Fax: + 358 0 4030 6300

Mr. Seppo Kärkkäinen. Research Professor, VTT Energy, Phone: + 358 0 456 6404, Fax: + 356 0 456 6538

2Key Literature1. The Electricity Market Act (386/95) of Finland

2. Council of State Report to Parliament on Energy Policy. Autumn 1993, 21 p.

3. Program on Energy Conservation for the Public Sector. MTI, C:40, 1994, 17p.

4. Report of the Energy Conservation Committee (in Finnish). October 1995

a All the internal telephone codes in Finland are changing 12th of October 1996. In the numbers here the digit ”0” after the Finnish coutry code will change into ”9”. For ex. this telafax number will be + 358 9 160 2695



4UK

Overview

Some of the key issues resulting from the restructuring of the power sector in UK include:

· Transition to a privatized, competitive electricity market with direct retail access for all customers in England and Wales. Scotland has two vertically integrated utilities, Scottish Hydro and Scottish Power. The electric supply industry in Northern Ireland, which is in the process of being connected to the grid in Britain, was privatized in 1993. A centerpiece of the restructuring and privatization effort was the creation of a spot market and power pool in England and Wales. All generators sell electricity into the pool in England and Wales and customers and distribution utilities purchase from the pool;

· Customer choice is being phased-in. This process began in 1990 for customers over 1 MW in demand. It has now been extended to and customers with demand over 100 kW can choose a supplier other than their local public electricity supplier (PES). By 1998, all customers will be able to choose their supplier;

· Changing capacity composition, i.e., declining use of coal and increasing use of natural gas in combined cycle gas turbines (CCGT);

· Emphasis on market forces to determine resource allocation and a belief that co-ordinated resource planning is neither necessary nor desirable;

· Price control regulation and performance criteria for monopoly functions (e.g., distribution);

· Regulatory reluctance to mandate large scale energy efficiency programs and evolution of new institutions to promote energy efficiency;

· A pilot program of open competition for domestic gas supply started in the south-west of England in April 1996, with full competition across all customers by the end of 1998.




1Energy Demand The 1994 electricity production in the UK was 325 TWh. Demand has grown steadily, roughly equivalent to GDP growth, since the early 1980’s, reaching 306 TWh in 1994 and is expected to continue on this growth path, according to the IEA.

2Projected Needs for New Energy Resources and CapacityGenerating capacity will grow by 5 GW and reach about 75 GW by the year 2000. Coal-fired generation will continue to diminish and gas-fired plants are expected to continue to account for an increasing percentage of market share.

The UK gas industry has surplus supply and many gas suppliers have commitments which exceed their sales. Three new fields are expected to come on line in the next two years which will further exacerbate the situation.

3Industry Structure, Market Type, Regulation/CompetitionThe electric industry in England and Wales was restructured and privatized in 1990 in the belief that competition was more effective than central planning in achieving economic efficiency. Prior to restructuring, electricity in the England and Wales was generated and transmitted by the state-owned Central Electricity Generating Board (CEGB). CEGB, a monopoly, transmitted electricity to 12 regional Area Boards responsible for distribution and supplya to residential, commercial, and industrial customers in franchise areas.

The CEGB was broken into three generating companies: PowerGen, National Power, and Nuclear Electric, and one transmission company, the National Grid Company (NGC). Both PowerGen and National Power were successfully privatized, whereas Nuclear Electric was removed from the privatization proposal when it became apparent that investors were unwilling to accept the liabilities of decommissioning and waste disposal.

a In many restructured markets, the “supply” function is the retail sale of the electric commodity, which is separable from the transport of the commodity by transmission and distribution entities.


Restructuring and privatization


The 12 Area Boards became Regional Electric Companies (RECs), which collectively owned the National Grid Company. The NGC has now been privatized. In Scotland, two vertically integrated power companies and a separate nuclear generator, were established. The newly restructured industry is regulated by the Office of Electricity Regulation (OFFER). Figure 1 provides an overview of the power sector in England and Wales.

NationalPower

British Energy

Power-Gen IPPs Others EdF Scottish

PowerScottishHydro

ScottishNuclear

Power PoolNational Grid Company (NGC)

Regional El. Companies (RECs)

Generators/Suppliers

Other LicensedSuppliers

Small Customers(< 100kW)

Large Customers(> 100kW)

Generators/Suppliers

OtherSuppliers

Small Customers(< 100kW)

Large Customers(> 100kW)

England and Wales Scotland

Customers

Suppliers

Generators

Figure 1 Overview of power sector in the UK

A centerpiece of the restructuring and privatization effort was the creation of a spot market and power pool. The National Grid Company is responsible for operating the power pool, establishing merit order dispatch and transmission planning and construction. All generators, including National Power, PowerGen, Nuclear Electric, foreign plants in Scotland and France, and the considerable number of independent power producer (IPP) plants built since vestinga sell most of their generated electricity into the pool. The bidders must declare capacity availability and bid price at half-hour intervals. All generators are paid the pool’s highest accepted bid price to serve each specific half-hour period. All generators providing power for the same half-hour period are paid the same price, irrespective of the actual costs of operation for any specific generator. The Pool Input Price (PIP), the price paid to the a Vesting refers to the time at which the public offering was made.


Spot market and power pool


producer, is equal to the system marginal price plus the capacity payment (if any). The Pool Output Price (POP), equal to the PIP plus an “uplift” charge to cover overhead, spinning reserves, etc., is paid by the buyers.

The creation of the pool initiated a series of financial contracts between the two privatized generators and the RECs. These “Contracts for Differences” (CFDs) come in two forms: one-way and two-way. One-way CFDs are similar to call options. In each period that the Pool Purchase Price (PPP) rises above the strike price, the “difference payments” are made to the holders of one-way CFDs. However, if the strike price is below the PPP, one-way contract holders receive no payment. Two-way CFDs are similar to a portfolio of put-call combinations. Payment is made from the writer to the holder of the CFD if the PPP is above the strike, but from holder to the writer if the PPP is below the strike. Close to 90 percent of all electricity sales are covered by these instruments.

A limited demand bidding pilot has operated in England and Wales for the last couple of years. Large customers indicate the amount of power they would purchase from the pool depending on the pool input price offered. The Grid Company reconciles both the bids of the suppliers and the quantities demanded by the buyers to come up with a pool price that better reflects the interaction between supply and demand.

Customer choice

A key feature of the restructuring in England and Wales was introduction of customer choice in their supplier. Customer choice has been phased-in from 1990 starting with customers over 1 MW in demand, and currently customers with demand over 100 kW can choose a supplier other than their local distributor (or REC). By 1998, all customers will be able to choose their supplier.

Customers with choice (those in the non-franchise market) may buy power from any REC, licensed supplier (including licensed generators and traders), or directly from the pool. All settlements take place through the pool. The contract between the customer and the supplier will also be of the “Contract for Differences” type. The REC retains a monopoly in supply to serve its franchise customers. The costs of power purchased by the REC to serve its franchise customers are treated as a direct cost pass through. The REC provides non-discriminatory distribution access, enabling competing RECs to sell power to non-franchise customers within their service territory.



REC revenues

REC revenues for the monopoly functions are limited by a price cap formula based on kWh sold. The price cap for distribution increases in accordance with the retail price index (RPI) minus a productivity factor (X). Power supply for the franchise market is regulated according to RPI-X+Y, where Y represents the supply cost pass through. The Non-Fossil Fuel Obligation (approximately 10 percent) raises funds primarily to subsidize the nuclear industries, although a small portion of these funds is used to subsidize renewable generation. These purchase costs are passed along directly to customers.

The regulatory scheme initially introduced for control of the distribution monopoly offered a strong incentive to maximize electricity sales and with no provisions for DSM program cost recovery or lost revenues. The price cap formula (RPI-X) tied the price for distribution services directly to the volume of electricity sold, thus providing a strong incentive to increase sales. Since the distribution function has a high degree of fixed cost, each additional kWh sold generates a high degree of profit once fixed costs are covered. As a result, the REC experiences high revenue loss if it promotes conservation.

Different supply and distribution price controls exist for England and Wales, Scotland, and Northern Ireland. OFFER amended the manner by which the supply price cap was applied in England, Wales, and Scotland so that about 75% of the revenues allowed through the price cap calculation are collected through fixed charges. The result is that the volume incentive has been reduced.

Review of Mechanisms

Table 3 provides an overview of mechanisms to promote DSM and energy efficiency in England & Wales. Some of these are discussed in further detail below.



ImplementingOrganization

Funding source Comments and Issues

Market transformation

Energy Savings Trust (EST)

Government Working with manufacturers and retailers, trade organizations and installers to stimulate the market for energy efficient products



Electricity standards of performance (SoP).

RECs

Monitored by EST and OFFER to ensure that their objectives are achieved

RECs charge equivalent to £1/account in small consumers retail market

RECs to achieve set energy savings targets established by the regulator (OFFER) in the franchise market

Examples include: cavity wall insulation, variable speed drives, CFLs, and others

Network of Local Energy Advice Centers (LEACs)

EST and Local Energy Advice Centers (LEACs)

50% government 50% local authorities, fuel utilities and other local sources

Free information on energy efficiency, campaigns, etc. Currently more than 33 centers operating

Grants for installation of CHP in multi-residential dwellings

EST Funded by gas E-factor

144 applications, 99 grants

Information and advice

EST Government Schools, domestic and SME sector

Best Practice Program

ETSU

BRSUE

Central Government

(~£15m pa)

Commercial and industrial sectors:

· R&D support.

· Demonstration project support.

· Information and dissemination.

Publicity and awards scheme

Energy & Environmental Management Directorate

Central Government

(circa £200,000 pa)

Corporate commitment campaigns.

Energy Efficiency Awards.

For commercial and industrial sectors.

Branding — “Project Energy”

EST Government Target include consumers, retailers, manufacturers, service and advice providers, government representatives, etc.

1Public Policy DSM



Energy Saving Trust (EST)

The Energy Saving Trust was established in 1992 as a means to meet the United Kingdom’s obligations under the Rio Declaration. The EST is a private limited company created to propose, develop, and manage programs to promote energy efficiency. Its original goal was to provide 2.5 million tons of carbon emissions savings annually in the UK by the year 2000 (i.e., 25% of the target set at the Rio Conference), but the government now believes it can meet its carbon obligations through activities independent of the EST. There are primarily three reasons for this: 1) electricity generation is in the process of transferring away from coal-fired to combined cycle gas turbine plants which emit less carbon, 2) greater than expected generation from nuclear power which emits no carbon, and 3) recession in the early 1990s.

The EST developed a comprehensive plan for how the carbon reduction goals could be met via energy efficiency investments on the understanding that these investments would be funded through regulator-approved levies in the gas and electric sector. However, neither OFGAS (the gas regulator) nor OFFER felt that funding to the extent proposed was within their authority.

Despite this shortfall, the EST has organized a number of market transformation programs that have been successful, but their impact has most certainly been limited by the EST’s funding. The EST had hoped that it would be able to influence large energy efficiency programs to be funded from gas and electric levies.

The British Government recently announced explicit funding (£50 million over 3 years) for the EST directly though national budgets — avoiding the unclear responsibilities of funding national energy efficiency activities through the regulators of the utility industry—even though it appears that the UK will exceed its carbon dioxide reduction target.

The EST is implementing an activity — “Project Energy” — which aims to signal a credible and consistent commitment to energy efficiency. Targets include consumers, retailers, manufacturers, service and advice providers, government representatives, etc.


Branding — “Project Energy”


2“Energy efficiency standards of performance”OFFER, recognizing that utilities were not being provided with incentives to pursue energy efficiency programs, conducted a review as part of the process to reset price caps for the distribution supply business. As part of the review, OFFER found that there are significant opportunities to economically improve energy efficiency in England and Wales. OFFER considered instituting a wires charge to fund DSM programs by the addition of an efficiency (“E”) factor, similar to the E-factor OFGAS has approved for gas utilities in 1992, in the price cap formula of the RECs.

While OFFER consulted with RECs and interested parties and the E-factor and reviewed the OFGAS experience with its E-factor, ultimately this approach was rejected. OFFER believed that this approach exceeded its mandate which it saw as promotion of competition in the power sector.

Believing that some form of REC involvement in energy efficiency was appropriate, OFFER has implemented equivalent to £1/account in the franchise marketa fee to fund energy efficiency programs. These “Standards of Performance” programs are being implemented by the RECs in the franchise market. The programs (as well as the £1/account funding for them) will persist only until the end of the franchise market.

To implement the programs, OFFER retained the Energy Saving Trust (see the discussion below) to advise OFFER on the types and scope of programs that would be acceptable to offer. OFFER has set fixed energy savings targets for each of the RECs which they must attain within the funding supplied by the levy. The EST services have also been retained by OFFER to monitor and measure the impacts of the programs. The EST has devised a series of generic programs which will result in an expedited approval process as well as assurances regarding the impact of the programs. The electricity savings target is set by OFFER for each REC and the cumulative discounted lifetime savings target amounts to 5,675 GWh.

a The franchise market is the market where customers do not currently have choice of their supplier; i.e. customers with a maximum demand of less than 100 kW.



The EST has designed several generic programs that expedite the approval process and expose the REC to limited measurement risk—that is, the savings per measure are agreed upon before the program is run. Savings estimates are based on the best available technology performance data, including data from governmental and non-governmental organizations such as BRECSU, ETSU, and EA Technology.

The Standards of Performance is applicable in England and Wales from 1994 through 1998 and in Scotland from 1995 through 1998. While the RECs are undertaking their Standards of Performance DSM programs, several RECs have also used shareholder funds to pursue DSM programs that defer investment in distribution upgrades. The RECs have an obligation to provide network access. Under the price cap regulatory system in place for distribution, capital costs are not passed through directly to customers. Thus, energy efficiency as a means of deferring investment in distribution projects may be profitable. The RECs, however, are evaluating these investments in terms of the benefits of avoiding investment versus the foregone profits of additional transport revenuea.

OFFER does not feel there is a reason to intervene in the non-franchise market. OFFER believes that a competitive energy service industry should be given sufficient time to develop. Furthermore, OFFER was unconvinced that market failures were sufficiently profound to compel intervention in the market, and that if such a decision were to be reached, it should be reached by the Parliament.

The Standards of Performance specifies the criteria to which electricity savings projects must conform:

· Priority should be given to projects which are likely to exert general downward pressure on the charge per kWh to consumers (the intention being to encourage DSM measures);

· Projects must address a variety of end-uses covering both residential and commercial franchise customers using less than 100 kW as well as different technologies;

· All customers must be taken into account but the interests of the elderly, disabled, those on lower incomes, and those living in rural areas should be noted in particular;

a As noted above, the volume incentive has been substantially reduced.



· Only projects where customers benefits exceed costs are permitted;

· The effect on the environment must be defined.

The main role of EST in relation to the Standards of Performance is to evaluate project documentation before and after project implementation, and to implement national schemes which cover more than one REC area, such as the CFL scheme.

229 programs have been approved by OFFER and the EST to ensure that their objectives are achieved. Over the lifetime of these approved programs, over four million tonnes of CO2 emissions will be saved and total lifetime savings of over 2700 GWh are estimated. It is also estimated that consumers benefit by £5 in energy savings for every £1 spent on these energy efficiency measures.

The measures addressed in the approved projects included:

· Cavity wall insulation

· Compact fluorescent lamps

· Draught stripping

· Hot water cylinder insulation

· Internal insulation of external walls

· Loft insulation

· Luminaries

· Night blinds for refrigerated cabinets

· Pendant fittings for CFLs

· Single glazing to low emissivity double glazing

· Single glazing to ordinary double glazing

· Storage heater upgrade

· Tank and pipe insulation

· Variable speed drives.



The target market has been divided into segments according to income (low-income, higher income, and commercial), building type (terrace, bungalow, detached, and semi-detached), or building ownership (owner occupied, social housing, and private rented) depending on the project. Targeting the lower income group is relatively easy, both through social housing providers (where there are suitable systems in place and one point of contact for many properties) and at individual customer level (where measures are free to lower income groups).

So far the cost-effectiveness of the approved projects is better than assumed (1.27 p/kWh instead of 1.65 p/kWh). The reason for the difference should be sought in that the RECs quite naturally are undertaking the most cost-effective projects first and the more complicated and potentially slightly less cost-effective projects thereafter.

3Business Based DSM

Customer Demand response issues

Since the England and Wales electricity industry was restructured and privatized in 1990, relatively few non-franchise customers have opted to purchase their power directly from the pool or under pool price “pass-through” contracts. Almost all of these customers have elected to take fixed price supply contracts or other forms of protection to minimize their exposure to fluctuations in pool prices. The main distribution businesses in the UK, the Regional Electricity Companies (RECs), in turn, have protected themselves from this volatility by entering into hedging contracts (“contracts for differences”) with generators. These contracts offer price stability but there has been a significant cost associated with setting up these arrangements, particularly at the margin. This has prompted RECs to offer pool price related contract options which pass the pool price risk to customers and hence allow a slightly lower net price due to the avoidance of the cost of a hedging contract. Thus the RTP contracts slightly reduce the RECs’ reliance on “contracts for differences” while still managing the price risk.

In addition, some RECs have began to investigate targeted demand management activities with the specific goal of deferring investment in system infrastructure, particularly in instances where the cost of investment in demand management is less than the cost of reinforcing the distribution network. This form of demand response activity is likely to become more attractive as price regulation of the “wires business” moves from fully volume-based to some non-volume-based approach (such as customer numbers based). This process has commenced with



some of the RECs’ allowable revenues now being customer numbers based.

Some of the mechanisms that have emerged from the RECs aimed at promoting demand response include:

· Contracts between suppliers and customers have featured interruptible/curtailable options — Suppliers have developed contracts that include lower net unit rates but include interruptibility and/or curtailable clauses, which mean that the customer bears much of the high pool price risk. These forms of contract are used by suppliers to minimize their exposure to the pool and can provide a lower cost of power to customers — particularly when the customer is prepared and able to shed or curtail their demand.

· Innovative contracts — innovative and sophisticated contracts based on accurate real-time prices have been developed and applied. These have included:

· contract options to reduce load at times of the highest pool price for large industrial customers;

· a whole range of capped, partially capped, shared risk contracts for customers above 100 kW; and

· extensive revision of dual rate tariffs for domestic customers.

Demand bidding pilot program

A demand bidding pilot program has been operating for the last couple of years. The demand bidding scheme works by allowing large customers to indicate the amount of power they would purchase from the pool depending on the pool input price offered. The Grid Company reconciles both the bids of the supplier and the quantities demanded by buyers to develop a pool price that better reflects the interaction of supply and demand.

Some of the arguments for and against demand bidding programs, as these have been stated by Offer, include

· It produces uncertain benefits to the system, relative to the costs of operating it

· It provides limited incentives to demand bidders, relative to participating actively in re-negotiating power supply contracts



· Demand schemes has been difficult to monitor and control

· It is manually intensive, relative to the limited number of participants

Retail Access and Technology Issues

By 1998 all customers will be able to choose their supplier. This will increase the demand for, and hence is encouraging advances in, sophisticated metering and communications technologies. Technologies available that may be widely employed include:

· Remotely programmable “smart” metering that will provide customers access to a range of multi-rate tariff options that better reflect market price signals

· Logging of customer energy use data and local graphical display so as to encourage changes in energy use behavior, and

· Remote meter reading.

References

Key Organizations and Contact Persons

Chris Barclay, OFFER, BirminghamPhone: (+44) 121 456 6221; Fax: (+44) 121 455 6277

Tim Curtis, Energy Saving Trust, London

Phone: (+44) 171 931 8401; Fax: (+44) 171 931 8548

David Barnes, OFGAS, LondonPhone: (+44) 171 828 0898; Fax: (+44) 171 630 8164

Ninder Kaur, OFGAS

Phone: (+44) 171 828 0898; Fax: (+44) 171 630 8164

Keith Marsh, London Electricity, LondonTel: (+44) 171 242 9050; Fax: (+44) 171 331 3108

Juliette Smith, Energy Saving Trust, London

Phone: (+44) 171 931 8401; Fax: (+44) 171 931 8548

Dan Staniaszek, Energy Saving Trust, London



Phone: (+44) 171 931 8401; Fax: (+44) 171 931 8548

Key Literature

Electricity Supply Industry, Structure, Ownership, and Regulation in OECD Countries; International Energy Agency; OECD; 1994.

Evolving The Electricity Industry’s Customer Markets, Products and Services; Ed Smith; April 1995.

Energy Conservation Issues in the UK, Robert E. Jones 1995, ISBN 0 9519172 50.

Energy Efficiency: Standards of Performance; OFFER.

The Efficient Use of Gas: The Role of OFGAS; OFGAS; November 1994.

Demand Side Measures: A Report to the Office of Electricity Regulation; Report prepared for OFFER; E. Energy Ltd and SRC International; October 1992.

Standards of Performance for England and Wales - First Year Review 1994-95; Energy Saving Trust; August 1995.



5NEW ZEALAND

Overview

New Zealand has undertaken a thorough-going restructuring of its electricity industry. In line with sweeping reforms that have been initiated throughout the economy, the electricity industry has been de-regulated and opened to competition.

The new structure of the market has the following features:

· Competitive generation;

· Common-carrier status transmissions and distribution systems, providing open access to all suppliers and purchasers of electricity;

· Competitive electricity retailers.

DSM have not recently been used to any significant extent in New Zealand. There is a high penetration of load control on residential water heating and night storage heaters, which was encouraged by the fact that prior to 1967 electricity distribution authorities were not charged for energy supplied by the country’s generation authority, but only for demand. As a result, a flat load shape was exceedingly valuable to them, and they in turn aggressively pursued load management strategies.

More recently, the vertical separation of the industry has made DSM of less interest except during times of shortages or in cases of network constraints. In both these cases, active programmatic efforts have been undertaken and have been successful.

In addition, the utility industry and government have offered energy efficiency information programs. These efforts have been


Vertical separation of the industry has made DSM of less interest except during times of shortages or in cases of network constraints.


supplemented by the activities of environmental groups.

Within the competitive industry structure DSM has been seen as a tool for strategic marketing rather than resource planning. Most efforts have been undertaken on a customer specific basis, though there is some evidence that energy services will become a “standing offer” as part of retailers’ efforts to attract and retain customers.

No formal processes are currently used to assess DSM potential from the utility perspective. Government, on the other hand, has assessed energy efficiency potential for both its environmental and economic impact potential.

Within the near future, DSM is most likely to be undertaken for the following purposes:

· Attract and retain larger contestable customers by electricity retailers;

· Provide information for energy efficiency and environmental purposes by government and the electricity industry;

· Defer network investments by the transmission and distribution system operators.


1Electricity Sales and DemandThe total energy sales volume (net of transmission losses and internal consumption) of the ECNZ for FY 1992-93a was approximately 27,750 GWh. New Zealand experienced reduced rainfall and water shortages in its hydro dams in FY 1992-93. Electricity conservation measures were encouraged, and electricity consumption in FY 1992-93 was 3.2% less than in the previous year.

Residential sector customers consumed approximately 10,125 GWh (36% of total), commercial sector customers consumed approximately 4,980 GWh (18% of total), agricultural sector customers consumed approximately 760 GWh (3% of total) and industrial sector customers consumed 11,885 GWh (43% of total). Industrial sector consumption included both 5,495 GWh of retail sales (20%) and 6,390 GWh (23% of total) for ECNZ’s wholesale transactions with its direct customers.

a From ECNZ Annual Report 1994.



2Projected Needs for New Energy Resources and CapacityAs shown in Exhibit 4 below, the majority of electricity generation in New Zealand is from hydro power stations. Between two-thirds and three-quarters of total production comes from this source, between a fifth and a quarter from fossil fuels and the remainder from geothermal sources.

The installed generating capacity of the system is 7,268 MW. Peak half-hour demand in 1992-93 was 5,149 MW.

6Exhibit 4 1992-93 ECNZ Generation Peak Capacity and Energy Sent Out by Location and Fuel Types

Power Stations Hydro Geothermal Thermal Purchased TOTAL

Fuel Steam Oil/Gas

Location/Capacity (MW) (MW) (MW) (MW)

North Island 1,599 257 2,243 N/A 4,099

South Island 3,169 0 0 N/A 3,169

TOTAL 4,768 257 2,243 N/A 7,268

Energy Sent Out (GWh) (GWh) (GWh) (GWh) (GWh)

Both Islands 19,682 2,113 7,774 10 29,579

Several separate forecasts have been made regarding the need for new energy resources and capacity. The most recent and comprehensive assessment, Electricity Supply and Demand in New Zealand, published by ECNZ in May 1994 used three scenarios of economic and energy market developments in the country in forecasting electricity demand and the availability of suitable capacity to meet that demand. according to this report a total of 1,100-6,400 MW new capacity would be needed by year 2020 (the latter representing the high economic growth scenario).

The study also reviewed the results of four other forecasts produced by government, ESANZ, and two other organizations.



Although the forecast studies differ from one another, they all agree on the following points:

· Electricity use will rise at a rate that is roughly equivalent to that of GDP;

· New electricity generation capacity will be needed despite a relatively significant increase in end-user adoption of energy efficiency and conservation measures;

· Although the overall energy intensity of the New Zealand economy is expected to improve, electricity intensity is expected to drop more slowly, due to increased uptake of new electro-technologies.

3Industry Structure, Market Type, Regulation/CompetitionThe New Zealand electricity supply industry, prior to the advent of reforms to introduce competition, consisted of a state-owned enterprise, the New Zealand Electricity Division (NZED), which was part of the Ministry of Energy. NZED controlled the generation and transmission of virtually all electricity in New Zealand.

Retail sales were administered by a large number of local energy supply (distribution) authorities (ESAs), with predominantly two major ownership structures:

· Electric Power Boards (EPBs) — autonomous governing bodies;

· Municipal Electricity Departments (MEDs) — subsidiary undertakings of municipal authorities, run as Council, City Borough or District departments.

Change was initially introduced to the generation end of the electricity industry. The NZED was corporatized to form the Electricity Corporation of New Zealand (ECNZ) and the transmission function was separated from generation as TransPower.

Prior to the introduction of competition to the New Zealand electricity industry, significant rationalization had taken place in the distribution sector. The number of distributors has been falling fairly steadily at the average rate of around one per year — there were more than 80 at the beginning of the 1960s and 43 by June 1995 of varying size.



In 1993, ten of New Zealand’s distribution companies were valued at less than $NZ 10 million. Some market observers expected that the introduction of retail competition to the New Zealand electricity industry would accelerate the historical decline in the number of power distribution companies. However, rather than mergers and acquisitions occurring, a number of these power companies have formed three buying groups. As of June 1995, PowerBuy Ltd had 10 members, Pacific Energy Ltd had 8 members and Energy Brokers (New Zealand) Ltd had 4 members. The remaining 21 power companies buy wholesale electricity directly from ECNZ.

To summarize the changes to date:

· The generation and transmission functions of the industry have been separated into different organizations, transmission and generated energy costs have been separated;

· Corporatization and vesting of (distribution) power companies was introduced in April 1993. Stock exchange listings of some power companies followed several months later and there has since been some foreign investment in the New Zealand electricity industry;

· Separation of wires and energy businesses, the opening of energy trading to companies without wires;

· The formation of buying groups by some power companies;

· Customer electricity bills showed separate line and energy charges from late in 1993;

· Complete retail competition was introduced in April 1994 so that all customers can now choose their energy supplier without constraint;

· The wholesale side of the industry was de-regulated in April 1994;

· A wholesale electricity market was planned along with the split-up of ECNZ to be finalized in February 1996 , making two large and several small players in the wholesale market;

· The dominant player in the market (60%) will be ECNZ with the large hydro stations, constraints imposed on its growth and requirements on offering contracts;


Changes to date


· A new state-owned enterprise (SOE) separated from the old ECNZ will be next largest (27%) with several thermal and geothermal plants and two hydro plants;

Sale of the Taranaki combined cycle gas plant and a package of gas will be completed and eight small ECNZ hydro plants will be offered for sale to power companies and Maori interests, joining the existing independently owned generation and proposed plant as small independent competitors (13%) in the wholesale market.




1OverviewTable 4 provides an overview of mechanisms in place in the power sector. These are discussed in further detail in the subsequent sections.





Energy Saver Fund

Energy Efficiency and Conservation Authority (EECA)

Government Used to provide a source of finance for projects aimed at improving energy efficiency in households

Energy-Wise Companies

EECA Government Voluntary campaign aimed at encouraging companies to make a commitment to improving energy efficiency in their organizations.

Crown Energy Efficiency Loan Scheme

EECA Government provides initial “seeding” finance

The scheme provides a revolving source of loan finance to government organizations for energy efficiency investments.

Minimum energy performance standards (under consideration for implementation)

EECA Government Proposed for electric motors, commercial lighting (fluorescent lamps and ballasts), residential refrigeration and water heaters

Home Energy Rating Options (HERO) scheme

Electric Corporation of New Zealand (ECNZ) and participating power companies

ECNZ/Power companies

The scheme offers energy audits, recommendations, and possible project financing to households.

Electric Motors and Drives Program

ECNZ and participating power companies

ECNZ/Power companies and part cost recovery via fee-for-service

High efficiency motor selector software, motor testing services and technical publications



2Restructuring and Implications for Mechanisms for Implementing DSMA key trend resulting from power sector restructuring is in favor of market forces to guide the decisions of both producers and consumers in the electricity sector. Within this framework, DSM in the context of integrated resource planning is unlikely to emerge as a planning perspective in either the generation or retail ends of the industry. DSM, on the other hand, can and has already emerged to some extent as a tool that retailers and even generators may use as part of their competitive and customer retention strategies. The key characteristics of this approach to DSM include:

· The DSM services will generally be offered at commercial prices. Only occasionally, DSM will be packaged as a loss leader to attract electricity sales. In addition, DSM services (other than information services) will generally be customized to the needs of individual customers;

· Cross-subsidies between customer classes and even between individual customers are unlikely to be acceptable;

· DSM services for the residential sector will be likely to continue to be dominated by information campaigns.

There is some possibility, however, that DSM and IRP could provide an applicable planning perspective to either or both the transmission or distribution functions, but only where the managements of these businesses receive either an incentive (which would need to be expressed in the applicable cost recovery and pricing mechanisms) and/or directive to maximize the return on fixed assets in these systems. In such cases, DSM and IRP might be taken up to a significant degree. In fact, several instances already exist where DSM has been used to defer network investments. On the other hand, there have not yet been any examples of network operators adopting an integrated (i.e., supply- and demand-side) approach to network system planning.

Government will continue to be involved in energy efficiency, however. An Energy Saver Fund (ESF) has been established to ensure that a market is available in which residential customers can access energy efficiency services during the transition to a fully competitive market. The ESF has a five-year budget of NZ$ 18 million). Other programs also exist for commercial and industrial customers, and tend to center on information,



equipment and building performance standards, and the provision of financing for energy efficiency improvements.

3Existing Mechanisms and Historical AchievementsBoth the government and the electricity industry have played a role in demand-side management in the past. The government has conducted numerous campaigns, primarily information campaigns, to encourage energy efficiency. These campaigns have primarily focused on the use of insulation in the residential sector, and according to ECNZ, achieved a relatively high level of awareness of the value of energy efficiency in the residential sector, and a reasonable level of insulation being included in new residential construction starting in the late 1979s.

More recently, energy efficiency in the residential sector has been emphasized by the environmental movement, and has extended awareness to technologies such as compact fluorescent lamps, water cylinder wraps, and passive solar design, among others, on the demand-side, as well as wind turbines and photovoltaic on the supply side.

In the electricity sector, demand-side management prior to the late 1980’s was primarily undertaken by the power (distribution) companies in response to the price signals provided by the country’s single electricity generation authority. Prior to 1967, the generator charged power companies on a demand basis only. As a result, the power companies promoted end-use control strategies that would help flatten the total system load profile. Again, these efforts tended to concentrate on the residential sector, and centered on ripple control of water heaters, and night-store electric heaters. ESANZ estimates that approximately 70% of all residential electric water heaters in New Zealand are under demand control and emphasized that this level of control has been achieved without the use of financial incentives of the type associated with US-style DSM. By contrast, this level of load control has been achieved simply through price signals (time-of-use pricing) and the provision of information to consumers. Both ECNZ and ESANZ credit these efforts with having significantly improved the country’s electricity annual load factor from what it would otherwise have been. Both emphasize that these efforts are continuing as the market is de-regulated and becomes more competitive.

Utility involvement in energy efficiency per se until recently was seen as a community service obligation, and was undertaken primarily as information campaigns, primarily targeted at the residential sector. The industry used both information and, to a far lesser degree, financial incentives to encourage customers to reduce electricity consumption during the drought-related



electricity shortages of 1992-93. As it turned out, these campaigns were exceedingly successful, and demonstrated the ability of the market to respond when given a sufficiently important reason to do so. In addition, however, the utility industry is increasingly viewing energy efficiency as a tool to be used in the competitive market. Several examples have surfaced of power companies offering energy efficiency and other energy services as part of their competitive contractual offers. In addition, ECNZ has established an investment fund for assisting commercial and industrial customers to increase their efficiency and productivity. These investments are made based on their profitability to ECNZ and are undertaken on a fully commercial basis.

HERO

Recently the electricity supply industry has also co-operated to promote energy efficiency in the residential sector through an audit based program called HERO. The audit tool and analysis system and marketing materials were developed by ECNZ and then marketed to customers by individual power companies and ECNZ working in partnership. Although market acceptance of the program at its inception was described by both ECNZ and ESANZ as slower than had been expected, ESANZ reports that is now on the rise, and ECNZ has determined that there is high awareness of the program in the community and that it has helped raise awareness of energy efficiency in the residential sector. Perhaps equally important, several of those interviewed felt it had helped to project an image of the industry as being concerned about customers during a period in the market process when power company mergers and buy-outs (including foreign investment) were raising fears in the community regarding the future of utility/customer relations.

ECNZ

Other information campaigns are targeted at the commercial/industrial sector and include efforts such as the ECNZ’s Motors and Drives Program which is implemented in partnership with individual power companies. The program aims at improving the efficiency and reliability of electric motors, electric motor controllers, and electric pumps and fans via a range of products and technical publications. These include the Motor Selector software tool which provides end-users with a tool to select higher efficiency motors and the Motor Monitor test instrument which gives an analysis of motor’s performance. A range of publications covering variable speed drives and motor selection are also published in this program. ECNZ also undertakes training and seminars in support of the Program as



well as providing energy efficiency services to several industry associations.

According to ECNZ, the most important factor that keeps customers from undertaking cost-effective demand-side options is the different (and generally quite a bit higher) discount rate that they apply to energy efficiency related investment decisions. In most cases, ECNZ has found these to be far higher than the utility would apply, and believes that they incorporate a very high risk premium from the customer’s perspective. Somewhat related, and almost as important, are customers’ perceptions of transaction costs. Particularly where the energy efficiency investment will require an interruption in the facility’s production activity these transaction costs are often deemed to be too high even before the sums are done regarding the potential lifetime savings. Less important are customers’ access to capital (which ECNZ believes is often given as a reason but is actually generally an excuse), and lack of information (ECNZ believes that there is a good deal of information around, and that most customers would know where to go to get information if they wanted it).

Energy Efficiency and Conservation Authority (EECA)

The Energy Efficiency and Conservation Authority (EECA) is an independent government agency charged with delivering and implementing measures and programs for achieving greater energy efficiency in New Zealand. It was established in 1992, is governed by a Board and is responsible directly to the Minister of Energy in the development of its strategies and programs. EECA’s mission cover’s a broad range of responsibilities including;

· Developing and advocating appropriate energy efficiency policies and strategies

· Acting as a catalyst to achieve technology transfer and changes in community attitudes and behavior toward energy use by implementing policies and programs

· Fostering the initiatives of and co-operating with consumers, energy suppliers and their allies, and

· Monitoring the changing technologies, patterns and efficiency of energy supply and use.



EECA’s operating budget comes from a combination of government funding and revenues earned from energy services such as energy audits, loan fees, seminars and training and sales of publications. In 1995 EECA’s budget was NZ$ 5 million, an increase of over NZ $1 million from the previous year. The organization employs approximately 40 staff with skills covering market research, engineering, policy, finance, education and marketing.

Since 1992, EECA has been responsible for a number of notable achievements:

· Energy Saver Fund (ESF) — As part of its reforms to the wholesale electricity market, the NZ Government has established the Energy Saver Fund, to be administered by EECA. The ESF provides an NZ $18 million pool of finance for household energy efficiency programs. Under the scheme funds are allocated by competitive tender to projects that are designed to achieve cost-effective improvements in the energy efficiency of households. Examples of the types of measures that are expected to be implemented include insulation of hot water cylinders, ceilings, floors or walls; installation of low-flow shower heads, draught-proofing and efficient low-energy lighting. It is expected that a wide range of organizations will apply for funds including; energy supply companies, community groups, equipment suppliers, energy services companies, industry and other voluntary organizations and major landlords.

· Energy Wise Companies Campaign — The Campaign was launched in 1994, supported by 50 founding member companies and 29 founding ally organizations. The Campaign is a partnership between the Government, energy suppliers and private sector businesses and involves participating companies making a voluntary commitment to improve energy efficiency within their operations. Current membership of the Campaign has reached over 250 companies and allied organizations.

· Crown Energy Efficiency Loan Scheme — The scheme provides a source of loan finance to government organizations for energy efficiency investments. The scheme has advanced over NZ$ 7 million to almost 100 organizations since its inception. The accumulated savings from all projects funded to date exceed NZ$ 8 million. The scheme is supported by the Government Energy Efficiency Leadership program which requires Government chief executives to undertake energy



management activities as part of their annual performance agreements.

· Development of guidelines for renewable energy developments — EECA’s policy group published the first two documents in a series of guidelines aimed at facilitating the development of new renewable energy resources in New Zealand. One of the documents provides a general introduction to the series while the second focuses specifically on planning issues related to the development of wind farms

· Consultancy Services — EECA’s Energy Services group have undertaken a number of commissions on a project management basis whereby sub-consultants are engaged to undertake audits. The majority of this work has been undertaken for public sector clients, energy suppliers and industrial organizations. Several commissions have involved energy audit training for staff of energy services companies.

· Other noteworthy EECA achievements and ongoing programs included:

· Contribution to development of the frame-work and methodology for voluntary industry CO2 reduction agreements

· Investigation into the need for and proposed form of minimum energy performance standards for selected commercial and industrial technologies

· Preparation of a draft Building Code provisions for improved energy efficiency in new residential and commercial buildings

· Development of plans, surveys and initial pilot programs for energy efficient water heating, commercial lighting and industrial motor applications

· Advertising campaign promoting awareness of the existing energy labeling scheme for appliances

· Completion of a study to assess the merits of mandatory vehicle emissions testing

· Initial work on developing a resource kit for secondary schools



· Completion of a draft analysis of the cost-effective potential for energy efficiency throughout New Zealand

· Completion of an analysis of the factors underlying the recent decline in New Zealand’s energy intensity

· Development of a strategy for monitoring and evaluating the effectiveness of all EECA programs.

4Pending Proposals and Key Future IssuesECNZ and ESANZ both believe that DSM will continue to be pursued in New Zealand in the following ways:

· Electricity retailers will use DSM as a means for attracting and retaining contestable customers. It should be recalled that New Zealand plans to have all customers be contestable over time;

· While franchise customers exist, DSM services targeted at them are likely to be limited to information programs;

· Environmental concerns will continue to be a key driver of energy efficiency;

· Utility-sponsored DSM will be expected to earn a commercial return. No cross-subsidies (either intra-or inter-class) will be tolerated;

· Government will continue to address energy efficiency via information and market transformation programs targeted at all segments, as well as a financial assistance program for the residential sector;

· Increasing attention may be paid to DSM in the area of network planning.



6NORWAY

Overview

Norway has introduced the most liberal market for electricity supply of all OECD countries. Key features behind The Norwegian Energy Act (1st January 1991) include:

· Open access to the transmission and distribution grid to any licensed generator or supplier, so that both are able to offer tailored bilateral contracts to their customers. All participants have access to the national grid and a spot-market;

· Remove responsibility of operating the national transmission grid from the main generating company (STATKRAFT) to a separate new company (STATNETT), to ensure transmission access on a fair and non-discriminatory basis;

· The Act does not require utilities to separate distribution and supply functions into separate corporate entities, but rather requires separation by accounting only;

· Distribution companies have been assigned responsibility for some energy efficiency activities. These activities are funded through a levy on the distribution of electricity.

Restructuring has fundamentally changed the incentives of utilities and customers to engage in energy efficiency activities and will change the nature of the relationship between the customer and utility. Utilities may not be good choices for


One of the key difficulties to date has been the difficulty to separate the public policy based DSM activities from those that should be regarded as part of a commercial activity for an energy business.


implementing energy efficiency intervention programs due to the diluted ability to cause the commercial and societal interests to overlap. In fact one of the key difficulties to date has been the difficulty to separate the public policy based DSM activities (if any) from those that should be regarded as part of a commercial activity for an energy business.

In contrast to, e.g., England and Wales, restructuring of the Norwegian power sector did not include privatization of the power industry, and the majority of Norwegian utilities are still publicly owned. Furthermore, the Norwegian power market is primarily based on bilateral trade between suppliers and customers. While a pool market does exist, the pool represents a small portion of electricity trade, though the market share of the pool is increasing.


1Energy Demand Electricity (77%) and oil (13%) are the dominant energy carriers in the stationary energy consumption in Norway, i.e., energy for other purposes than transport. Since 1980, there has been a decrease in stationary oil consumption and an increase in electricity consumption. This has happened in spite of the fact that the electricity price for the most of this period has been above the price of oil for heating purposes. A large share of the oil for heating purposes is being used through boilers that use both electricity and oil. In Norway, about 82,000 such boilers exist in industry (7,000 MW) and residential. There is a large efficiency potential in upgrading these boilers to a faster response time and a higher efficiency.

Because of the close to 100% hydroelectric system, Norway is energy constrained rather than capacity constrained (the reservoir capacity is 79.3 TWh). Norway has a high electricity consumption per capita (27,800 kWh in 1993), mainly due to the fact that a large share of total power production is being used for power intensive industry (e.g., aluminum and ferro) and the cold winter limit (high electric heating demand). The average household use approx. 15,000 kWh per year. Total domestic energy consumption was 112 TWh in 1993, and can vary as much as 20%, depending on precipitation (108 TWh in a normal year).



2Projected Needs for New Energy Resources and CapacityElectricity production in Norway is almost exclusively based on hydroelectricity. The maximum generation capacity available is 27,100 MW in 845 power stationsa. There is adequate peak capacity, but the hydroelectric system periodically requires additional resources to meet its energy requirements. Such developments will add to the surplus of domestic peak capacity. The development of new resources is therefore directed towards (1) the export of peak capacity and (2) the inflow of energy in periods of high domestic prices (energy constraints). There is, at current, 3,200 MW capacity available to the neighboring countries, and this capacity is being increased for export purposes.

There are two plans for developing new resources related to trading off protecting the environment against the development of new hydroelectricityb. A series of categories of hydroelectric resource potential. balancing cost-effectiveness with sensitivities associated with the environmental and political concerns are established. The total hydroelectric potential 1994 was estimated to 176 TWh, of which 109.4 TWh was developed, 34.9 was conserved, 1.2 TWh was under development. In addition, concessions for expanding 1.4 TWh were given and 17.7 TWh was available for development. The large generators and national oil-companies are developing plans for building one or more gas fired combined-cycle generators for electricity export purposes.

3Industry Structure and OwnershipThe structure of the industry is changing due to the new energy act, and this process is expected to continue for quite some time. There is currently more than 60 production companies; 33 producers own 96% of the production capacity. Of the 108 TWh of average annual production capacity, 54.6% is owned by municipalities and 27.4% by Statkraft SF, with the remaining 18% privately owned. There have been some buy-ups of smaller utilities by Statkraft SF (e.g., Finnmark Energiverk), and there is also a concern that since Norway has joined the European Economic Area (EFTA), Norwegian municipalities may be attracted to sell the hydroelectric facilities to large international utilities. The Government may select either (1) to refuse any a There is also 278 MW thermal capacity (Norwegian Ministry of Energy “Energy Facts 1994”).b The Protection Plan IV for Watercourses and the Master Plan for Water Resources.


Producers


such sale, or (2) practice the Norwegian principle of “hjemfall” in which the rights to exploit water resources would revert to the state after a given period.

There are 54 owners of medium-voltage networks — above 110 kV — and some 200 local distribution network owners. Approximately half of the distribution companies own power production facilities, and roughly 60% of the total energy is supplied through vertically integrated companies, including power intensive industrial customers that supply their own power.

There is currently a debate as to whether the restructuring taking place as a result of the new act really is sufficient to achieve the intentions behind the act. This discussion revolve around a number of issues, including:

· Should utilities be required or encouraged to split up vertically? There are examples were large producers have been prevented from buying distribution companies because of the fear of market dominance;

· Should a legal (and physical) separation between distribution and supply activity be required? There are doubts about the true roles of the competitive supply activity and the monopoly distribution because of the inherent conflict of market interests. There are examples of some public utilities who have chosen to separate completely. However, requiring separation may introduce a potentially large economy-of-scale loss;

· Do utilities have the right owners? There are arguments that go against municipalities being involved (through their ownership) in electricity supply. With the liberalized market this is a business exposing the owners to large risks. Maybe the supply entities should be sold off to other ownership and the municipalities should limit their involvement to the monopoly distribution business.

4Regulation

Transmission and Distribution Fee


Distributors


The national transmission network (above 130 kV) is operated by STATNETT SFa, the regional network (130 kV and 60 kV) is owned by regional utilities, and the local grid (20 kV and below) is owned by distribution utilities. Pricing of power transport in Norway is based on the following elements:

· General terms — Each user of the grid pays for power from the grid, and each generator pays a transmission fee for feeding power into the system. Each user of the grid pays only to the entity this user is linked directly to. For example, a retail customer pays only to the owner of the local distribution grid. The fee includes the costs of operating the grid at higher levels (paid by the distribution owner to the regional owner);

· The fee for feeding power into the grid has a fixed (for all grid levels) capacity component (59 NOK/kW installed capacity) and a variable energy component. The energy component reflects marginal grid losses, which can be considerable when close to grid capacity limits. The value of these losses is equal to the power price in the spot-market, i.e., at the time of occurrence of the loss. The loss varies depending on voltage level, the point at which the generator feeds into the grid, and the time of day and year. For example, a generator can have a negative energy component if its location reduces losses instead of increasing them. Further, the energy component is large in areas of surplus production. The energy component is lowest at night-time and during summer when load usually is low;

a STATNETT SF is a state-owned entity responsible for providing open transmission access to facilitate wholesale and retail competition.


Third party access (pricing of power transport)


· The fee for taking power out of the grid varies between distributors (due to geographical and load differences) by voltage level. The fee has three components: A fixed component which is the same for all customers, a capacity component depending on the customer’s maximum demand (kW), and an energy component depending on energy consumption (kWh). A typical commercial customer paid 0.16 NOK/kWh for transport services (weighted average) in 1994. Residential customers’ fee consists only of an energy component. A typical residential customer (15,000 kWh/year) paid, in 1994, an average transport fee of 0.195 NOK/kWh.

A New Regulation Regime

The current regulation regime is characterized by the tariffs charged for transmission and distribution gives the grid owner complete cost recovery including a regulated return on investment.a This regime does provide weak incentives for the grid owner to invest optimally, there are rather indications that this regime provides over-investments in certain grid regions. The Norwegian Water and Energy Administration (NVE) wishes to encourage grid owners to realize possible cost reductions through introducing incentive-based regulation where allowed costs and revenues are decoupled from the actual costs and revenues. NVE will establish caps for grid owners charges and will allow for a larger portion of realized cost savings to be kept by the grid owner. A new regime is scheduled for introduction on a pilot basis as of Jan-97. Major tariff cost reviews are proposed in five year intervals.

5The wholesale power marketAll utilities, and other large companies (traders and brokers) participate in the wholesale market. Also large end use customers can participate instead of purchasing through utilities brokers or traders. A key purpose of the wholesale market is to force utilities to shop around for power. After the introduction of the power market, if a utility buys high-cost power, it runs the risk of loosing market share to other suppliers. Most of the wholesale volume has been re-negotiated, or includes a new party, since the new energy act was enforced.b

The wholesale market has had a tradition to enter into long-term contracts (10, 15, and 20 years duration). Most of these power contracts are either re-negotiated or partner has changed after the energy act. In many regions the distribution company

a Currently this equals the return on government bonds plus one percent.b Source: NVE.



entered into agreements where a wholesale supplier was given the unique right to serve the total consumption in the distributors’ region. The new legislation prevents such contracts, but many of the old agreements are still in place. Many of the large vertically integrated utilities still serve most of the power in their own region with their own generation.

Distributors often enter into a combination of long- and short-term agreements, adapted to the risk in the power market. Some distributor trade directly in the spot markets and many trade spot-power via the regional wholesale utility.

A study performed by NVE showed that the average price in the wholesale market in 1995 was 16.5 øre/kWh, i.e., fixed price agreements with varying duration. The volume on these terms was 55.5 TWh.

8Exhibit 5 Overview of the Norwegian Power Market

Central Grid(420 kV)

Regional Grid(132 kV)

Local Grid(22 kV)

DailyMarket

(15 TWh)

Generation

WeeklyMarket

(7 TWh)

RegulationMarket

(6 TWh)

BilateralContracts

(~80 TWh)

Traders Brokers

Power Market Place

Import

Export Consumers

STATNETT Marked — Physical and financial markets

The power market, as administered by STATNETT Markeda, consists of three distinct markets:

a STATNETT Marked is a company formed by the former national dispatch center (“Samkjøringen”), and is now a company legally and physically separated from the grid administrator (“STATNETT SF”). Independent traders have established other “competing” marketplaces.



· The regulation market — is primarily a balancing market where bids are used to price imbalances between participants and contracted generators;

· The 24h or spot market — is a day-ahead market where power is priced for five daily intervals during the week and three intervals on the week-end. Short term delivery, i.e., for delivery next day, is only linked to physical delivery

· The weekly or forward market — is a week-ahead market extending two years into the future. This market is purely financial from September 1995 because this made it easier to adapt to changing price conditions, e.g., for generators to buy out un-economic commitments in periods where this is attractive. The closer to physical delivery, the price in this market converges towards the price in the spot market. The increasing share in the weekly market also expresses the actors desire to trade with more standardized contracts (than bilateral contracts traditionally have offered).

An overview of this market is provided in Exhibit 5.

New contract forms — Options and Terms Markets

Historically the wholesale market has been dominated by bilateral contracts of a form that normally was not tradable, and made actors incapable of adapting to changing market conditions during the duration of the contract. To reduce uncertainty in power trading, the markets have introduced the possibility to trade with several standardized products.

· Price guarantees — i.e., if the spot market price exceeds an agreed-upon price, the buyer will receive the difference from the seller an visa versa if the spot price is lower than the agreed-upon price. This agreement is financial and reduces need for metering

· Bilateral options — i.e., a right, but not an obligation to purchase/sell a specific amount of power at an agreed upon price a certain period in the future. This product is largely offered by power brokers, clearing is done by STATNETT Marked AS, to ensure anonymity and financial security

· Term-contracts — i.e., contracts that have a standardized format allowing a standard contract to be traded, and the participants to adapt to expectations about the future price.



Market Risk

The risk in the power market is considerable, and much recent focus from the utilities is devoted to managing this risk. The spot-price was very low for long periods in 1992/93 (average 0.057 NOK/kWh in 1992). Most of 1993 and 1994 experienced low inflow to the hydroelectric system along with cold winters, resulting in higher spot-market prices.a Managing this risk therefore requires considerable attention from the utilities. E.g., was summer power on the weekly financial market in Mar-96 traded at prices more double of what summer power was traded for the same period in 1995. Information on price variations is provided in Appendix.

A Nordic Power Marked and “Nord Pool”

In Jan-96 STATNETT Marked merged with “Svenska Kraftnät” to form Nord Pool — a common Norwegian/Swedish power market. A power market (El-Ex) will be operative in Finland from Jun-96 and will be further developed into establishing common trade across Nor/Swe/Finnish borders.

Several of the large generation companies have been very active in its neighboring Nordic countries. Vattenfall AB has purchased large Finnish distributors and established power sales offices in Oslo. IVO (the largest Finnish generator) has purchased large stakes in “Gullspång” (the third largest Swedish generator) and Statkraft SF (the largest Norwegian generator) has purchased large stakes in Sydkraft AB (Sweden’s second largest generator), along with French EdF and German “Preussen Electra”.

6The retail market and customer responseA key objective for the retail market is to provide customers with a choice of supplier. This increases the incentives for the supply function to purchase power economically.

Fee for changing supplier

There is a fee for changing supplier, depending on the size of the customers’ annual power consumption. Small customers (annual power consumption lower than 500,000 kWh) do not have to install a hourly load recorder in order to obtain supply

a The average spot-price in the six first months of 1994 was 0.175 NOK/kWh compared to the average price of 0.07 NOK/kWh in 1993. The highest price in 1994 was 0.48 NOK/kWh.


Zero fee for changing supplier


from a source other than the local distributor, but can choose to be billed on the basis of the “rest-of-system” load shape profile. This means that the distributor subtracts the system profile all power sold through hourly metered contracts and bill the lower than 500,000 kWh customers based on the remaining system profile. This system requires no need to install a separate meter for the lower than 500,000 kWh customers and thus a substantial reduction of the metering costs. The maximum fee for small customers changing suppliers was regulated to NOK 200 (+ 20% VAT), and will from 1997 be zero.

For customers whose annual power consumption exceeds 500,000 kWh, the grid owner is responsible for installing and paying hourly metering equipment for larger than 500.000 kWh/yr customers. For the services to these customers, the grid owner can charge the suppliers a fee of NOK 4000/yr. In case customers lower than 500,000 kWh, or the customer’s supplier, wishes to be metered on an hourly basis the grid owner is responsible for doing so. he may charge a fee not exceeding NOK 2000/yr for these services.

Retail Market Responses

The experience to date is that just following the introduction of the reform there where substantial real-price reductions in power price, especially at the wholesale level. These reductions were usually larger for industrial and commercial customers than for households. The main reasons for these reduction was perceived to be larger-than-average hydro inflow spring periods and lower-than-average demand winters. Following this reduction period, cold winters (high demand) and less-than-average inflow spring periods (low hydroelectric reservoir level) have resulted in higher prices.



Since enforcing the lower maximum fee for households wanting to change supplier, only few households have been observed to actually do so, in spite of a up to 50% difference in residential power retail price between regions. Key reasons are believed to be (1) relatively low retail electricity prices in this period, i.e., many households are not likely to find large savings from changing retail supplier, (2) it has been difficult to change supplier because many utilities give preference to supplying customers in their own license area, and often quote different prices to small customers in own region relative to customers outside, i.e., the retail market for small customers is not yet fully developed, and (3) there are large uncertainties among actors active in the market and offers from different suppliers can be perceived as difficult to compare.

There are examples of utilities receiving more than 4,000 telephone calls from residential customers after TV campaigns for “discount power”. From 1996, STATNETT Marked is establishing an “information exchange” making it easier and more accessible for residential customers to compare and select price offers. The vast majority of residential customers still purchase power through their local utility. Surveys conducted shows that only small share of residential customers have actually changed supplier.

However, even if not many small customers have changed suppliers, the spot price formation can be argued to have produced large impacts:

· Geographical price variations substantially reduced — The spread in historical retail power prices between regions and those currently paid by residential or small commercial customers are substantially reduced. In Jan-96 70% of all residential customers experienced power prices in the 17-19 øre/kWh span,a whereas in Jan-95 only 35% of customers experienced process in this span. A key reason to this is believed to be the price information provided to utilities and customers and that utilities adapt retail prices to market prices. Suppliers with prices way above market prices have been forced to offer reduced prices, even if not many households have changed supplier

· Average price reductions — Average price to residential customers was 1. Jan. 1996 17.8 øre/kWh. This is a reduction of 0.4% relative to Jan. 1995

a In 1995, residential customers had an average price of 17.7 øre/kWh (Source: NVE). Prices after Jan-96 are not available.



· Selective small customers are offered prices based on short term prices — some utilities offer also small customers (i.e., residential and small commercial) to purchase at prices related to the spot price of electricity. This could e.g., include offers for residential customers to purchase all power exceeding last years consumption at spot related price, producing a benefit or a loss to the supplier and/or customer depending on the development of the spot market price

· Retail customer aggregation — customer groups aggregate into power purchase organizations to form an improved power purchase position. There are also examples where brokers act on behalf of retail customers to both form the aggregation (i.e., organization form, metering, etc.) and conduct the contract negotiations with power suppliers

· More than 50% of utilities report to only supply residential customers in own traditional (i.e., license) region

Review of Mechanisms

1OverviewThe power sector reform has induced a stronger need to separate between two fundamentally different types of utility involvement in DSM:

· “Business based” DSM — which primarily is directed towards attracting and/or retaining customers and therefore purely has strategic profit-motives. The activity is directed towards getting the price right to the right customer, through reducing the power (commodity) price (e.g., price discount) and providing cost reducing or value adding services for the customer (e.g., targeted metering and billing service or energy management systems);

· “Public policy based” DSM — which is provided for customers as part of a public policy activity required by the government, e.g., for environmental or resource conservation reasons

Table 5 provides an overview of mechanisms in place in the power sector. These are discussed in further detail in the following sections.

9Table 5 Overview of Existing Mechanisms in Norway





Funding Source Comments and Issues

General Information

Operating Agents (REECs)

Govt. Budget (Wires Charge)

Press/media exhibitions, lectures, development of new information material. REECs also active on the local/regional level

National Campaigns

Operating Agents (REECs)

Govt. Budget (Wires Charge)

In close cooperation with the REECs

Branding Operating Agents Govt. Budget Brand energy efficiency to increase visibility and credibility. In cooperation with the REECs

End user Information

Grid Owner/REECs Wires Charge E.g., historical energy profile, guidance to customers on cost effective energy efficiency behavior and investments, school programs

Simple audits Grid Owner/REECs Wires Charge Advice on energy efficient solutions. Anti-competitive behavior is important.

Training and Education

Operating agents (REECs and Grid Owners)

Govt. Budget (Wire Charge)

Centrally developed training material made available for local implementation

Commercial Building Program

Operating agents and building network

Govt. Budget Energy Management is one focus area, close cooperation with REECs and others as network coordinators

Technological Dissemination

Operating agents Govt. Budget Support is provided to businesses who provide energy efficient solutions

Industry programs

Industrial Energy efficiency Network (BN)

Govt. Budget Energy Management and benchmarking are focus areas.

2Public Policy Based DSM

Mandatory DSM Requirements

The grid owner is required — as part of distribution license requirements — to undertake certain DSM activities such as


A DSM distribution charge of 0.002 NOK/kWh was imposed


information, demonstrations, and audit programs. The license holder (the distribution utility) is allowed to recover actual costs related to the requirement of carrying out public-policy based DSM activities by imposing a distribution charge of maximum 0.002 NOK/kWh. This constitutes approximately 120-140 mill. NOK (14.6-17.1 mECU) nation-wide. There are plans to increase the maximum charge by 50% to 0.003 NOK/kWh from 1997.

Regional energy efficiency centers

Partly because the act does not require a complete separation of utilities into distribution and supply functions, little is preventing distributors from use this levy to support marketing activities such as customer attraction/retention, strategic marketing, and load building. The guidelines from the Norwegian Energy and Water Administration (NVE) specifies that the distribution levy should not be used to favor own retail function.

NVE has since taken actions to better ensure that this levy spent consistent with its objectives. A number of independent Regional Energy Efficiency Centers (REECs) have been established that are funded by the DSM wire charge. These REECs are jointly owned by utilities and third parties in each region. The main motive behind creating the REECs was to reduce potential anti-competitive behavior by removing the monopoly-funded energy efficiency activities from the distribution utility and the economy of scale benefits from centrally pooling knowledge and resources. With the many small and dispersed utilities in Norway, many do not have the resources to establish significant activity and human resources on DSM and energy efficiency.

NVE believes that the REECs will offer more objective advice than was likely to be provided by the distributors and the REECs are likely to reap economy of scale benefits from merging the regional DSM activities into one regional center. There are plans to form 15-19 REECs. Several have already been established and are pursuing energy efficiency projects. REEC activities include:

· General information on energy efficiency;

· Historical electricity consumption data;a

· Energy advice, particularly on the efficiency of individual residential customers, small commercial businesses public buildings, and small industries;

a Distribution companies are obliged to provide this as part of their licensing requirements.



· Simple audits and analysis indicating which energy efficiency actions are likely to be most cost-effective, and how to have them installed;

· Information on environmental impacts from energy consumption.

3Business Based DSM

Utility energy efficiency and the supply function

As indicated above, there have been biased motives for utilities to pursue DSM. Suppliers have tended to focus on cost, and thus the right price in the power market, as their primary competitive issue. There is a tendency to focus on customers’ contribution to profit and risk of particular customers changing supplier. A common strategy for many suppliers has been to serve and maintain good relationship with core customers in their own traditional service region and only go after selective customers outside their own region to the extent that a competitive advantage is believed to exist.

Some customers, however, value services in addition to low priced commodity products. For example, suppliers see a benefit in providing certain customers with customized metering and billing services that provide insight into electricity costs. Such services are useful, for example, for franchise customers to compare costs and profitability among outlets (e.g. supermarkets, restaurants, hotels).

Since Norway is an almost 100% hydroelectric system, the electricity supply is principally energy rather than peak capacity constrained. For this reason, there has been greater concern about the impact of two sequential dry years than concern about exceeding maximum generation capacity limits. There has historically been minimal day/night variations in price. Thus, in Norway, the main incentive to encourage demand response amongst end-users has rested with the grid owner and to a lesser extent with the generator or retailers. This is likely to change as a result of higher integration with the thermal generation system in Sweden and the continent. Most customers who have signed contracts so far in Norway have tended to focus on the price reductions they can obtain without any change to their load rather than on demand response related price advantage.

Customer Demand Response Issues

While there is very little quantitative information available on the demand response mechanisms that have emerged from


Utilities have the right to pass on the costs of paying a capacity fee on power, but are under no obligation to pass on the capacity element to their end use customers


Norway some general observations can be made:

· Capacity fee — a capacity fee is levied on wholesale market participants in Norway to compensate for HV grid losses and this capacity component is differentiated both geographically and in time (high/low load periods). Only 15% of wholesale market participants are end-use customers, exclusively large industrials, while the remaining 85% of customers see a tariff that has gone through one or two utilities (i.e., through the supply/retail function of the distribution utility). Utilities have the right to pass on the costs of paying the capacity fee on power (and will adapt their portfolio accordingly), but are under no obligation to pass on the capacity element to their end use customers

· Wholesale level retailers/customers — face a time dependent capacity fee and can adapt to this in a way that is optimal for each market participant. Some end-users will have substitution possibilities (usually oil-substitution) and will adapt their consumption accordingly, for example use oil when power is more expensive. They will therefore behave in a similar way to a wholesale market participant.

· Retail level customers — These customers face a tariff determined by their retailer. Often this retailer will face the capacity fee, but its typically up to individual retailers to determine how this is passed on to each customer.

· Residential customers — There are examples of residential customers facing a varying energy price (per kWh) by year to reflect wet versus dry years. For example, last year was a wet year and residential customers are likely to face a 25% drop in the unit price of energy.

· Curtailable/dispatchable power — An important curtailable demand response option in Norway is the electricity-oil substitution potential of many industrial boilers (i.e. electrical boilers with oil-heated backup systems). These systems have always been used by large industrial customers to purchase occasional/surplus power when available and are also actively used by industrial customers to enter into spot-purchase agreements or purchase from the spot market when prices are attractive. This power is curtailable on between a 1 hour to 24 hour notice. Around 1000 MW of electrical boilers are registered under curtailable agreements. The



decision of investing in substitution possibilities and/or substituting is decided by the total price seen by the customer (i.e. power + grid price components). Retailers offer these customers supply contracts with the curtailable boiler option. Almost all grid owners offer such arrangements primarily to avoid capacity constraints on the grid. It has also been observed that customers are willing to pay more for power than an oil equivalent price should give. This may possibly be due to customers lacking information on prices. There is an interesting example where an oil company (Norsk Hydro Oil) has been marketing software and equipment allowing improved analysis of the benefits for individual customers to enter into electricity/oil switching agreements. The software has been marketed mainly to power retailers, to be used as part of their marketing strategy.

· Other Industrial Curtailable agreements — There is some observed demand response from other industrial customers to curtailable load contract arrangements. Some utilities have entered into agreements with customers where the utility acts as a total supplier of curtailable load; an arrangement which provides the utility with greater flexibility to shed curtailable load during periods of high spot prices.

· ”Pressure” from retailers for exposure to extreme pool prices — A number of retailers are now writing contracts that leave the customer to carry the risk of extreme pool prices, due in part to a number of retailers nearly going broke during a period of extreme pool prices. These contracts are likely to play an increasing role as experience with volatile pool prices has become available.

· Other Forms of Price Hedging — In 1994 some customers used power in spite of high spot prices, which can be explained by the fact that many of them had negotiated attractive hedging agreements. Many customers are purchasing power purchase options (i.e. for a small premium the customer gets a guaranteed price at a fixed point in the future, at that time minus, say, 3 weeks the customer decides whether he wants to use his option or not. The use of options is increasing, mainly because it is a (relatively) easy instrument for many customers to relate to.



4Pending Proposals and Key Future IssuesA key future issue for the DSM mechanisms to be implemented in the restructured power sector in the future will be that they do not conflict with competition.

Strengthened Retail Customers’ Access and Response to Wholesale Market Prices

The take-up of load-shifting equipment and agreements is definitely increasing, and this trend is likely to continue. Key reasons for this include:

· The opening up of the inter-Nordic market (Norway/Sweden and later Finland) increases the day/night price variations, i.e. the economic benefit from day-night load shifting becomes more evident.

· Remote metering will become available for larger customer groups, (partly regulator driven). Currently >500,000 kWh/yr customers are required to have hourly metering equipment installed. In future this requirement is likely to include also >100,000 kWh/yr customers. The opportunities for two-way communication and real-time pricing energy management, etc. are becoming more readily available. Hourly metering will be required for more than 1.5% of all customers.

· General market awareness about opportunities appears to be increasing. Retailers, traders and brokers have started promoting load-shifting benefits as part of their marketing strategy.

The Norwegian Electric Power Research Institute (EFI), is initiating (Spring 1996) a research project to investigate how to establish the trading relations for an end-use market for capacity. This project is supported by 15 utilities, national research council, the regulator (NVE), the federation of utilities (EnFO) and the grid administrator (STATNETT SF). When this project is completed “the concepts for an end-use market for capacity shall be established, tested and evaluated, prototypes of different necessary technology shall be developed and implemented, the benefits for participating parties established, as well as testing and evaluating the price for buy-back and load control for all voltage levels and customer categories.” This is a NOK 32m (A$ 7.4M) effort over four years. There are large benefits from such a market for all market participants, for example increased system efficiency, competitive advantage relative to oil, and reduced energy bills.



Key elements that have to be in place before a market for capacity can function include:

· a minimum number of market participants must be active;

· accepted (juridical) agreements must be in place (Standard agreements);

· quality assurance (QA) on metering; and

· routines for metering and billing must secure market access of all market participants.

Important metering issues which remain to be resolved in Norway include:

· establishing communication standards, and

· determining the ownership and access to metered data.

Refined specification of Public Policy DSM

There must be a very clear separation between public policy DSM and business based DSM. Example of efforts planned to improve this is “a detailed specification of monopoly DSM efforts”. This includes a detailed specification the type of activities to be included as part of the activities paid by the wires charge (e.g., simple audits of single family household energy consumption) and estimation of unit costs for carrying out these activities (e.g., the cost of carrying out one simple audit of a single family household).a These unit costs can be applied to perform a more effective monitoring of the mandatory DSM activities undertaken.

Business Based DSM — Encourage Uptake of Service Elements in Power Retail Contracts

There are cost effective services that may be included into power retail contracts, but which currently only are offered or requested to a very limited extent. Key reasons for this are likely to be (1) low electricity retail prices, (2) immature market, and (3) limited contractual framework in place for entering into this type of contracts.

One strategy that government and NGOs may consider using to promote DSM services is to investigate the likely barriers to this and the possible ways to overcome these. Based on information a This effort is developed jointly by federation of utilities EnFO and NVE.



about the barriers, strategies may be developed for certain retail customer groups to start requesting likely cost-effective services as elements of their request for proposal (RFP) for power. As certain services are being requested by customer groups, bids from power retailers are more likely to include service elements. In it’s simple form a government strategy may e.g., be to develop “check-lists” for specific customer groups for them or their representing power broker to use before and during power contract negotiations. This can lead to an increased uptake of DSM and energy efficiency services and is potentially an example of a strategy for promoting DSM and energy efficiency that does not conflict with competition. Strategies for promoting such services are currently being developed by power retailers and others, in particular capacity related services that attempts to increase the customer’s end-use load flexibility (e.g., power/oil substitution).

5References


Mr. Jan Moen, Director of Market Division, Norwegian Energy and Resource Adm. (NVE), Phone: (+47) 22 95 95 95; Fax: (+47) 22 95 90 99

Mr. Birger Bergesen, Head of Energy Efficiency Section, Norwegian Energy and Resource Adm. (NVE), Phone: (+47) 22 95 95 95; Fax: (+47) 22 95 90 00

Mr. Ivar Wangensteen, Senior researcher, Norwegian Electric Power Resource Institute (EFI), Phone: (+47) 7 59 72 00; Fax: (+47) 7 59 72 50

Mr. Klaus Livik, Group leader, Norwegian Electric Power Resource Institute (EFI), Phone: (+47) 7 59 72 00; Fax: (+47) 7 59 72 50

Mr. Bjørnar Otterstad, President, Norsk Kraftmegling, Phone: (+47) 72 89 06 22; Fax: (+47) 72 89 06 33

Mr. Eivind Magnus, Partner, ECON, Phone: (+47) 22 42 42 50; Fax: (+47) 22 42 40 49

Mr. Thor Mjøs, Director, Norsk ENØK og Energy AS

Key Literature

Energy Facts 1994 (in Norwegian); Norwegian Ministry of Energy; 1995.



Electric Utility Regulation Structure and Competition. Experience from the Norwegian Electric Supply Industry; Jan Moen; NVE; January 1995.

Consequences for Tariffication and End-use After Deregulation. Experiences from the Norwegian Utility Industry; Klaus Livik and S.E Johansen; Paper presented at the ECEEE 1992 Summer Study; 1-5 June 1993, Rungstedgård, Denmark.

DSM in a Deregulated Hydroelectric System; Jon Anders Holtan and Ivar Wangensteen; Norwegian Electric Power Research Institute.

NVE 1995 “Is abundance just another word for wasting it away?” brochure published by NVE.

Johansen S.E. et.al. “DSM in Restructured Markets” paper presented at the Euro-DA/DSM Conference in Rome, Nov-95.



7SPAIN

Overview

Structure and Regulation of the Spanish ESI

The vertical structure of the Spanish Electricity Supply Industry (ESI) is complex. The high voltage network is owned by Red Eléctrica de España (REE), the state-owned company formed in 1.985 from the high voltage transmission assets of all firms of the industry. REE also manages the central dispatch of the system. Thus, Spain was one of the first countries in the world to adopt an independent system operator for its ESI. The generation and distribution sectors remain linked by ownership, even though all energy flows through the system managed by REE. Four groups exist:

Company Generation Share Distribution Share

ENDESA Group 50% 41%

Iberdrola 27% 40%

Unión Fenosa 13% 15%

Hidrocantábrico 5% 4%

Self Generation 5% -

Although ENDESA is primarily under state ownership, about 32% of its shares are controlled by others. Iberdrola and Hidrocantábrico are completely under private ownership. Union Fenosa is under private control although about 7% of its shares are owned by ENDESA.

Since 1987, regulation is Spain has been organized primarily around Marco Legal Estable (MLE), which establishes "standard costs" for all factors of production in an ex-ante "yardstick" approach to set the Base Rate that generate revenues collected by distribution companies. The standard cost regulatory structure gives incentives for efficiency. Since the firms know what their revenues will be under MLE, they know what cost reduction will increase profits.




In December, 1.994, the Spanish Parliament enacted a new electricity law. known as LOSEN, which is intended to increase competition and transparency, while retaining the positive elements of the current regulatory frame. Key issues underlying the reform of the Spanish ESI are:

· The balance between regulated and unregulated industries

· The supply guarantee

· The relationships among the state administration

· Autonomous Community Administrations.

The basic principles behind the reordering are:

· Unified Tariff — ensuring that the same type of supply has the same price throughout Spanish Territory, independently of the supplier company,

· Obligation to Supply — deriving from the conception of electricity supply as a public service, necessarily guaranteed,

· Joint Planning of new capacity — with the objective of optimizing investments to be made and to guarantee the adequate diversification of the sources of supply, and

· Unified Management of Operations — allowing companies to reduce their variable production costs.

The principal features of LOSEN are:

· The creation of a regulatory body (the Commission of the National Electricity System, C.S.E.N.),

· Establishment of Independent Production System,

· Unbundling of the activities of Production, Transmission and Distribution,

· Modification of the Statutes of REE,

· Definition of a Special Regime of Electricity Production (mainly Cogeneration and Small Hydropower),



· Adjudication by means of competitive bidding for the new generation units,

· Definitive solution to the nuclear moratorium,

· Access to the transmission and distribution networks for third parties, and

· Demand Side Management.

Review of Existing Mechanisms

1IntroductionThe objective of managing demand to date has been to reduce the cost of kWh sold, implementing time-of-day tariffs to increase demand capacity factor (i.e., flatten out the load curve). Currently, the management objective is more ambitious: to reduce the cost of power consumed per unit of final product, including the lower volume of power consumed and the lower environmental cost in the definition of cost, in addition to the lower unit price.

The unified operation of the Spanish ESI makes the entire electric power system both promoter and a user of Demand Management. REE is in charge of providing optimum coverage through competitive mechanisms - of demand brought in by each utility and involving operable consumers, i.e. direct demand management, in such optimization.

The Spanish electric power system, anticipating for some time that consumer co-operation could be relevant in demand management, promoted a first major research and demand management effort. In 1988 a research system, in which all markets participated, was designed to study the use of electric energy and power. This project, INDEL, is narrowing in on a knowledge of demand management opportunities on the Spanish market.

Currently, when demand management programs are acquiring increasing importance at the domestic and Community level, Spanish electricity utilities have already built up a sound information base and solid experience.

Direct demand management

Spanish consumers have also been directly involved in the operation of the system. REE manages the load and/or energy input attributable to consumers with automatic interruptible and



hourly power rate tariff (THP) arrangements. In the future, distributors will be able to supply the integrated system with customers who are able to make short-term adjustments in their demand.

Interruptibility

Interruptability is a measure that allows consumers to voluntarily decrease consumption at system operator request. In exchange, the consumer is granted a discount on he electric power bill. Failure to comply with interruption entails a surcharge. The interruptibility is a measure that allows to voluntarily decrease consumption at system operator request. In exchange, the consumer is granted a discount on the electric power bill. Failure to comply with interruption entails a surcharge.

The interruptibility mechanism works as follows: consumers agree to interrupting a certain amount of power whenever REE deems it necessary to ensure electric power supply, in such event, the operator advises these consumers to decrease their consumption by the amount covenanted. The load curve of the interruptible consumers has an inverse profile to the curve of the system. The largest consume occurs at night. The peak of the load curve is made at four o’clock in the morning as a working day.

Hourly power rate tariff

The objective of this tariff is to reduce the demand for electric power on certain days and times of day considered to be critical to the System. Reduction in consumption is voluntary and the intention is to achieve it by means for price signal. This is a new tariff, rather than a complement to the existing one. This tariff divides the electric year into 7 tariff periods according to season, days and times of day and is composed of one billing item for power and another for energy.

Time-of day- tariff for low voltage, in force in Spain since 1983, intends to modify the aggregate load curve by shifting part of consumption form peak to off-peak periods, thus optimizing system operation. It has made little headway in the domestic sector, but is more significant in other sectors.

2DSM Activities in 1995The Energy National Plan 1991-2000, currently in force in Spain, foresees the advisability of achieving a homotetic load curve shifting of the system during the planning period. With this purpose it intends to put into practice demand side management measures, in order to improve the capaticy/energy ratio, that will



allow a greater use of the installed capacity and a reduction of new capacity needs.

The Real Decreto 2550/1994 that established the electric rate for the year 1995, empowered the “Ministerio de Industria y Energia” (Industry and Energy Dept.) to achieve Demand Side Management incentive programs through the rate and retributive system.

Table 6 provides an overview of mechanisms in Spain.

10Table 6 Overview of Mechanisms in Spain.



Funding Source

Comments and Issues

PAEE 1992-2000

(Energy Efficiency and Saving Plan)

MIE (Ministry of Industry and Energy)

Government PAEE is a comprehensive program of actions, included in the PEN 1991-2000 (National Energy Plan), approved in Jul-91, and updated in Mar-95, which establishes a portfolio of grants for energy efficiency projects.

NBE-CT-79. (Building Basic Standard on Thermal Conditions in buildings)


MF (Ministry of Fomenting)

Government Mandatory standard for all new buildings approved in Jul-79, which includes a comprehensive collection of prescriptions oriented to energy saving.

IT.IC (Technical Directions and Complementary Directions for HVAC installations in order to rationalize their consumption


MF (Ministry of Fomenting)

Government Mandatory directions approved in Mar-85 and oriented to energy saving in domestic sector.

DSM and Energy Efficiency provisions in Electricity Act. Approved in Dec-94

Utilities Programs cost added to Standard Cost Base Rate

Ten DSM programs carried out throughout all Spanish market in 1995 (see Appendix A).

Interruptible Contracts Red Electrica de Espana (REE)

Rate included in the Rates Schedule

All HV customers can request from their distributor interruptibility over 5 MW for at least 5 years.

Information Dissemination

ADAE (Association for

Utilities budget Objectives include: -Educational Tools, -





Funding Source

Comments and Issues

Electricity Applications)

Assessments, -Advice on appliances and tools

Promotional Campaigns for energy efficient lighting

Information Dissemination.

IDAE (Institute for Energy Diversifying and Saving)

Government and own resources

Objectives include: -Publications and Educational tools, Working group with associations and companies involved, Assessment, Promotional activities

Implementation of new funding sources for efficient equipment.

Night Rate Utilities Rate included in the Rates Schedule

Residential Sector

The amount assigned to these programs had a maximum ceiling of 5.000 MPta ($42 million). Its distribution should be fulfilled with an objective character and a previous checking of the achievement of the foreseen goals.

In order to promote the materialization of these efficiencies on the side of the demand, a program of direct incentives to the electric utilities was designed, in the distribution field, which should act as a direct or undirect incentivation channel for particular electric energy consumer collectives, and so that to improve some fields of performance in the same distribution activity.

Following are the main guidelines in which an efficiency capacity and great saving were identified in Spain that might be held through the electric utilities:

· Lighting.

· Efficient low consumption residential equipment.

· Low consumption equipment in the commercial sector and in the medium and small enterprise sectors.

· Generating sets management programs.

· Loss reduction in the distribution.



· Load curve shifting in customers and non modulating rates.

· Energy vectors.

As a result of the forementioned, following are included the approved programs during 1995:

· DOMOLUZ PROGRAM (Low consumption lamps in the residential sector)

· Objectives — 700.000 Efficient lamps (CFL)

· Customer incentive — 750 Pta/CFL

· Requirements — Residential sector customer

· ACTANO PROGRAM (Heat storage with night time rate)

· Objectives — 32.000 heat storage and 9.910 water storage

· Customer incentive — 20.000 Pta. for heat storage and 8.000 water storage

· Requirements — Customer rate 2.0 Minimum consumption per year of 4.500 kWh or double electricity consumption in the winter than in the summer.

· DOSALUZ PROGRAM (Lighting in educational centers and health centers)

· Objectives — 125.000 light points.

· Customer incentive — Variable depending on the center.

· Requirements — EGB Schools, City Halls, university centers and health centers.

· PUBLIC LIGHTING

· Objectives — 17.000 light points.

· Customer incentive — 35 per cent of pilot project flux regulation costs.

· Requirements — City Halls.

· REVEM PROGRAM (Engines electronic regulation).



· Objectives — To regulate 30.000 kW in engines.

· Customer incentive — 35 per cent of the equipment costs.

· Requirements — Industrial customers with a contracted capacity over 150 kW.

· ICE STORAGE PROGRAM

· Objectives — 4 Pilot experiences.

· Customer incentive — 5.000 Pta for each storage kWh.

· Requirements — Third sector.

· EFFICIENT FRIDGES PROGRAM

· Objectives — 10.000 efficient fridges.

· Customer incentive — 25.000 PTA. fridge class A, 20.000 PTA. fridge class B and 15.000 PTA. fridge class C.

· Requirements — Residential sector

· HEAT PUMP PROGRAM (Direct heat substitution for Heat Pump)

· Objectives — 200 installations.

· Customer incentive — 10 Pta for kcal/h of thermic calorific nominal capacity of the heat pump installed.

· Requirements — Residential sector.

· COMPENSATING PROGRAM OF REACTIVE POWER.

· Objectives — 250 installations (93.750 kVAr)

· Customer incentive — 1.500 Pta. for kvar of installed condenser.

· Requirements — Third sector and industry.

· GENERATING SETS PROGRAM.

· Objectives — Power analysis and design of experiences.



· Customer incentive — Third sector.

· The interim results of these programs are included in the Table 7.

·

11Table 7 DSM Programs 1995 — Interim Results and Compensating Costs.

Costs (Mpta)

Program Objective Result Achieve-ment (%)

Objective Results

Domoluz

(Nr. Lamps) 700.000 540.745 77,2 1,620,0 1.235,8

Fride

(Nr. Fridges) 10.000 21.178 211,8 248,4 490,0

Actano

(Nr. Storage heating) 32.000 26.648 83,3

(Nr. Storage A.C.S.) 10.000 882 8,8 1.035,1 1.046,4

Revem (kW with REV)

30.000 24.479 81,6 273,0 234,7

Public lighting

(Nr. Lamps) 5.000 5.500 110,0

(Nr. Light points regulated)

17.000 21.200 124,7 150,0 158,0

Ice Storage (Nr. experiences) 4 2 50,0 200,0 174,0

Heat Pumps (Nr. customers) 200 110 55,0 45,0 24,7

Reactive Power Compensation With Customers

(Nr. KvaR installed)93.750 79.688 85,0 187,5 159,4



3Utility based DSM and energy efficiencyWhat follow are perspectives the major Spanish utilities have on DSM and energy efficiency.

ENDESA group and associated utilities.

The Spanish ESI is immersed in a change process towards the liberalization of the business. The main motivation of the Spanish Administration is the wish to reduce the electric energy cost for the Spanish consumers within a short time. In this new environment it seems difficult that the financing of the Demand Side Management programs is achieved charged to the rates, as it happened in 1995 and 1996. In fact, in a completely liberalized scene, the demand management programs should be financed by the electric utilities. This financing system would restrict very much the amount and scope of the programs that could be achieved. The Utilities could finance DSM campaigns if this allows a reinforcement of their customers linking, in the frame of a business which doesn't limit to the sale of electric energy.

The liberalization of the ESI should be made compatible with the social commitments of improvement of the energy efficiency and environment protection, and in this sense it seems that the only possible option is to intervene in the market. In this way, following are included some of the ideas we think are justified:

· The DSM financing could be achieved through a fee on the distributed electric energy.

· The operating agents who would develop the campaigns should be the Electric Utilities themselves, although another external agents could also participate.

· It should be required a standardization of the analysis mechanisms that allow for a transparent and fair selection of the programs to be accomplished and those to be refused.

· Finally, an independent arbitration entity should be constituted, in order to manage the funds collected and to audit the carrying out and the success of the programs.

IBERDROLA

In the last years Iberdrola has been working on several studies and programs related with DSM, IRP and Commercial areas, with a number of strategic approaches, including:



· To consider both energy efficiency and demand management as almost synonymous concepts inside a global energetic and economic efficiency conception (competitiveness, profitability, value for money...). And this having always in mind the client’s, utility’s and society’s points of view (primary energy savings, environmental impacts reduction...) through a cost/benefit analysis.

· To be acquainted with the requirements of the different types of customers in this sense and to act consequently, promoting particular electricity appliances of interest on the one hand, and developing transmission performances of the appliances, information, training and advice activities on the other; always with the idea of achieving a more rational and efficient use of the electric energy.

· To collaborate with manufacturers, suppliers and market prescribes in general, in aspects with relation to the aforementioned, and R+D projects/programs, for the improvement of existing appliances and/or development of the new ones.

Union Fenosa

One of the main goals of UNION FENOSA energy policy is to obtain a more efficient use of the energy, in order to generate saving and to prevent inadequate emissions to the environment. Union Fenosa has devoted significant resources to improve energy efficiency through seven DSM programs in 1995, in accordance with the Spanish ESI regulations.

Union Fenosa supports other solutions than "ecotax" to reduce "greenhouse" effect. Using less carbon fuels, self-auditing, "eco-labeling", developing end-use technologies and voluntary agreements like Technology Procurement are some of them.

Several principles should guide future energy efficiency policies in the utility sector. First, Performance-Based Ratemaking (PBR) to ensure that least cost planning and operational outcomes are consistent with the financial self-interest of the regulated firm. Second, funding for energy efficiency objective should be made competitive neutral and the concept of the non-bypassable universal system benefits charge can satisfies this purpose. And, Third, funding for promoting energy efficiency must be consistent with the development of a energy services industry.

On the other hand, Union Fenosa has been paying a special attention for years to the development and application of the renewable energies. Renewable energy resources such as small hydropower, solar, tidal, photovoltaic, solid waste, wind and biofuel are expected to play an increasingly significant part of



Union Fenosa energy production. In 1994, the photovoltaic plant Toledo PV (owned with ENDESA), the second of Europe with 1,2 MW of installed capacity, was put into operation. Next to this plant, it is currently being built a bioclimatic building which will be fed by the former. The Cabo Vilano Wind Park, with 4,5 MW of installed capacity, has two units of the bigger wind generator of Spain, the AWEC-60 with 1,2 MW of rated capacity per unit. The Tidal Program OLAS-1000, which is currently being developed in the Atlantic Ocean, will have seven units and a total installed capacity of 1 MW. The biomass pyrolisis plant located in Meirama proceeds on its satisfactory experimental work. The Small Hydropower Program with a total capacity planned of 131.394 KW represents an investment of 150 millions dollars, up to 1997. Finally, between 1991 and 1994, the Cogeneration Program achieved the development of 110 projects with a total installed capacity of 897,1 MW and an investment of 750 millions dollars.

Union Fenosa has established the Permanent Lecture Hall of Environmental Education, which frames the continuous training of the utility personnel in charge of the environmental management. The "green team" accomplishes the environmental evaluations of all the utility generating units, aiming at the fulfillment of plans for the environmental management of the atmospheric, water, and waste spreading, and prevention against spills.

In the light of the increasingly competitive business environment, Union Fenosa has adopted customer focused and market driven strategies through the establishment of new services, in order to best serve the customers and to do it in a more personalized way. Following are some good examples of this strategy. The “Help to Life Service,” whose health requires the reliability on an uninterrupted residential supply; the “Self-control Service,” through the free installation of a special meter allowing to purchase electricity in a day by day, week by week, or month by month basis; and an information service which allows the customer to enter in the enterprise data base, in order to obtain the necessary information to control and use electricity in a more efficient and cheaper way.

Hidrocantábrico

Hidroelétrica del Cantábrico initiated in 1995 the implementation of three programs in the residential and service sector aimed at enhancing energy efficiency and at shifting the load curve towards higher capacity factors. The programs were DOMOLUZ, for the introduction of high efficiency residential lighting, ACTANO, to increase the use of heat storage (with night time rate) for hot water, and, DOSALUZ, with the target of



installing more efficient light spots in schools and hospitals. All of them report good results, with high acceptance and customer satisfaction.

Hidrocantábrico has intensified its environmental activities, and paid increasing attention to environmental awareness in schools by means of visits for pupils to our power stations (including hydraulic power stations) and distributing brochures and documents which show all the aspects which join energy and environment, and the need to preserve the latter.

However, the demand side management activities will have to adapt to the new regulatory framework which will result from introducing competition and increasing in the electricity sector in Spain. The new model of retribution for electricity companies tends to eliminate the charges on the electrical rate rather than to permit them. Therefore the necessary incentives for utility driven DSM programs is not yet clear in the future competitive market. It is argued that, if the result of liberalization is that the electric utilities have to cope with the financing of DSM programs without any compensation, the number of programs are likely to decrease, as the income of the utilities depends on energy distributed and delivered to customers.

References

Key Contact Persons

Mr. Jose E. Arceluz, Iberdrola, Bilbao

Phone: (+34) 4 415 2022; Fax: (+34) 4 415 4579

Mr. Javier Casas, Electrica Reunidas, ZaragozaTel: (+34) 76 21 8000; Fax: (+34) 76 23 5259

Mr. Alfredo Chofré, Sevillana, SevillaTel: (+34) 5 441 7311; Fax: (+34) 5 441 5605

Mr. César Goya, Adae, MadridTel: (+34) 1 555 2111; Fax: (+34) 1 597 1495

Ms. Rosalia Martin, Unesa, MadridTel: (+34) 1 570 4400; Fax: (+34) 1 570 4972

Mr. Jesús M. Martin Giraldo, Union Fenosa, Madrid

Phone: (+34) 1 567 6000; Fax: (+34) 1 567 6679

Mr. Conrad Messeguer i Sebastiá, Institut Catalá d'Energia, Barcelona



Phone: (+34) 3 439 2800 ;Fax: (+34) 3 419 7253

Mr. Jose M. Mias Naves, FECSA, Barcelona

Phone: (+34) 3 404 1858; Fax: (+34) 3 443 1559

Mr. Juan J. Muños, Fecsa, BarcelonaTel: (+34) 3 404 1858; Fax: (+34) 3 443 1559

Mr. Juan J. Oleaga, Iberdrola, BilbaoTel: (+34) 4 415 2022; Fax: (+34) 4 415 4579

Mr. Mariana Ortiz, Red Electrica, MadridTel: (+34) 1 650 2012; Fax: (+34) 1 650 7677

Mr. Juan G. Paradinas, Unesa, MadridTel: (+34) 1 570 4400; Fax: (+34) 1 570 4972

Mr. José Manuel Rivero, Hidrocantabrico, OviedoTel: (+34) 1 650 2012; Fax: (+34) 1 650 7677

Ms. Carmen Rodriguez Villagarcia, Red Electrica, Madrid

Phone: (+34) 1 650 2012; Fax: (+34) 1 650 4542



8SWEDEN

Overview

Key issues facing the Swedish power sector include:

· Whether, how and when to out-phase nuclear power plants

· Creating a satisfactory framework for a deregulated energy market

· How to deal with the dominant role of some energy businesses (especially Vattenfall).

Declarations from the Government indicates that Vattenfall is likely continue to be state-owned so that the Government maintain the power to interfere through ownership should unforeseen problems in the deregulated system occur.

· There is a need to establish clear retail-wholesale framework agreements, since:

· Price discrimination is becoming an issue because of the public ownership and

· Clear guidelines for what information the grid-owner should provide do not exist.

An information system for trading customer data must be developed. As it is today, distributors are those who have the most information on customers and the regulator is likely to chose one of two options to deal with the information problem: (1) Making all information competitive and secret versus (2) making all information publicly available.


1Energy DemandThe 1994 energy balance was 461 TWh mainly produced from hydro (42%) and nuclear (51%)power plantsa An overview of the 1994 electricity production is given in exhibit 1. Net import of electricity was 0.5 TWh. The share of wind power reached 0.06% in 1995, which equals about 0.072 TWh.

a Source: “Energy in Sweden 1995 NUTEK Analysis”.



12Exhibit 1 Electricity Production 1994

Energy Resource TWh %

Hydro Power 58,1 41,95

Nuclear Power 70,2 50,69

Industrial back pressure power 4,0 2,89

Combined heat & power 4,6 3,32

Cold condensing power 0,8 0,58

Gas turbines 0,1 0,07

Biofuels for electricity production 0,2 0,14

Net import 0,5 0,36

Total 138,5 100,0

The existing capacity of the power system is expected to meet projected demand until the end of the 1990s. Several small-scale hydro projects are expected to add about 1 TWh to supply by the mid- 1990s. In addition, import agreements for 2,4 TWh per year have been signed between Vattenfall and the Norwegian Statkraft for the second half of the decade.

The Swedish grid has connecting links with Norway, Finland, and Denmark and a 500 MW undersea cable-connection with Germany is under construction.

There is presently over capacity in the T&D system and avoided costs of T&D capacity are thus not examined. Only avoided energy costs are examined.

Emissions

In accordance with the Agenda 21 (based on the Rio Convention) Swedish utilities have to investigate their operations with respect to CO2 reduction. Sweden has therefore introduced a CO2 tax to try to stabilize CO2 emissions at 1990 levels by year 2000. The targets for reducing sulfur emissions are 80% from 1980 to 2000 and NOx emission will be sought reduced 30% from 1980 to 1995.

Electricity is subject to 25% VAT and to energy taxes at the point of use but not to environmental taxes.



2Industry Structure, Market Type, Regulation/CompetitionThe Swedish nuclear plants are owned and operated by Vattenfall, Sydkraft, and two other utilities. Vattenfall was made a state owned limited liability company and the transmission net was separated out as a separate company, “Svenska Kraftnät.”

Sweden decided in a referendum in 1980 that nuclear power phased out by the year 2010. Some programs to develop alternatives were begun both with respect to alternative fuels and energy efficiency. These programs have since then been reinforced and developed along with the greater awareness of different environmental issues - especially since there are obvious implications with respect to CO2 with the phasing out of nuclear power.

Along with these developments in attitude and in political leadership there is, however, great unanimity in wish to deregulate (rather re-regulate) but there will be emphasis put on different aspects. Today’s government (December 1995) has proposed a simple version with competition on supply but neither a pool to set prices nor provisions to secure energy efficiency have been imposed.

The final rules for the deregulated market are still being discussed. The basic idea is however, that the customer regardless of size should have the opportunity to shop for the best alternative delivery. Production and sale of electricity will be exposed to competition while transmission (national, regional, and local) is to be regulated and monitored. Since 85% of the generating capacity is held by three generating companies there have been raised doubts as to whether there will be any real competition. An introduction of a pool where at least spot capacity can be sold seems inevitable to make sure that prices are transparent to all customers. The Swedish national Grid (“Svenska Kraftnät”) has the system responsibility for the national transmission network and is investigating the preconditions for setting up a spot market for short-term electricity purchases.

Another issue is how to handle the small farmers in the mountains and the like since they will not be a profitable segment seen from the energy companies’ point of view. the consumer’s current right to electricity supply, as well as the concession holder’s obligation to supply, will be dropped with the restructuring. Concessions will be either for a certain line or for a network of lines within a geographic region. Concerns about small commercial and residential users will be addressed by providing a five year transitional system with supply



concessions. Concessionaires’ customers, however, will have the right to select a different supplier if they give six months notice and arrange for adequate metering. Distributors with supply concessions will have an obligation to supply existing customers. The concession arrangement will be reviewed in about two years.

The Price Control Board for Electric current will be disbanded under the proposed structure and the only regulatory price reviews will be for network service.

Presently, small and medium sized customers pay a SEK 4,000-5,000 fee for a meter which will allow them to purchase electricity from alternate suppliers. All distributors fees are based on actual costs. Regional network tariffs may not be constructed in such a manner that transmission charges depend on where within the concession area the customer is connected.

Power Sector Regulator (NUTEK)

NUTEK is Sweden’s central public authority for matters concerning industrial and technological development and changes necessary to adjust the Swedish energy system to new circumstances.

As an independent authority, NUTEK Electricity Market is responsible for the supervision of the grid operations in the deregulated electricity market. The purpose of the activities of this division is to safeguard viable conditions for an efficiently working deregulated market based on competition.

The main tasks of NUTEK Electricity Market are to issue concessions for the transmissions and distribution of energy, deal with questions concerning tariffs for the grid operations, and lay down rules of the grid companies’ accounting. NUTEK electricity Market is in charge of the surveillance of the grid services and has to make sure that the consumers do not pay a higher price than necessary and that the transmission tariffs, metering, and communications systems etc. are designed so as to facilitate and promote competition.

Early experience with the liberalized power sector indicated some frustration from retail customers because of the variations in distribution fee between regions. The opening up of the Swedish power market coincides with a period of high power prices. There was observed some criticism from market actors towards the regulator (NUTEK) and transmission grid owner (“Svenska Kraftnät”) because necessary preparations were not in place by the time the market was to open up.


Early experience


A number of customers with premises and activities multiple regions of Sweden have purchased electricity through master contracts for all premises. This has resulted in lower prices. Groups of smaller customers have also aggregated to purchase electricity centrally to obtain more favorable prices. Many large customers have valid contracts entered into prior to the act came into force. In spite of this, there are observed a number of changes of suppliers as well as participation through trade on NordPool, the common Norwegian/Swedish power market. Few single small customers have been observed as active in the market.

A tax increase on electricity both in production and sales — which coincided in time with the deregulation of the power market — explains some of the price increases on the grid and power tariffs experienced by many customers. Customers at the low voltage level have experienced the largest relative increases. Prices increases have also resulted from structural changes in tariff areas. This has primarily affected customers in densely populated areas when these have been merged with more sparsely populated areas to form one tariff zone.


1Overview




Technology procurement

NUTEK (co-ordinates tender and selection)

Equipment suppliers (compete for delivery)

Purchasers (indicates willingness to order)

Govt. budget and self-financing

Purchasers indicate willingness to place an order if certain efficiency conditions are fulfilled

Suppliers compete on design and price

NUTEK arranges tendering competition and supports the clients in purchasing at first series, thereby guaranteeing a set quantity

Incentive agreements

NUTEK (co-ordinates)

Industrial companies, property administrators and energy utilities

Government budgets

Agreements are signed with industrial companies, property administrators and energy utilities.

Companies are given an incentive to install more






(contract partners) energy efficient equipment

Program requirements

NUTEK Government budgets

Voluntary purchasing standards giving examples of energy efficiency products and applications for a wide range of areas


Regional energy efficiency centers

Government budgets, EU support and other

Two key activity areas:

· energy efficiency

· alternative energy sources

Co-ordinates with EU energy efficiency network


NUTEK Government budgets

Performance contracting

Utility subsidiary Commercial agreement between service provider and customer

Some activity experienced,a primarily commercial and public sector buildings

2Existing Mechanisms and Historical Achievements

“Uppdrag 2000”

The largest generator, the state-owned company Vattenfall, started a large program for energy efficiency, “Uppdrag 2000.” Vattenfall found that energy efficiency measures profitable from a customer perspective could be estimated to be around 20%. This project has since been terminated in its original form and results have been transformed to internal corporate business process. Some activities are continued but information on these are not publicly available.

Today’s Swedish Energy Efficiency Program (non-utility) is aiming at a 10% reduction of the present 1994 end-use consumption before year 2000.

a One example is “Göteborg Energi” which profitably operates a performance contrating subsidiary.



Swedish National Board for Industrial and Technical Development (NUTEK)

NUTEK’s Department of Energy Efficiency is involved in over 900 projects aiming at introducing energy-saving technology in order to reduce electricity use. The aim is to reduce the use of energy within the areas studied by 10 TWh in the 1990’s. The Government has made SEK 900m available in a seven-year program to achieve thisa. The department’s work consists of three key parts: (1) technology procurement, (2) incentive agreements, (3) program requirements.

Technology procurement consist of a number of important future-oriented clients gather to make functional demands on, for example, energy-efficient lighting. The purchasers indicate that they are prepared to place an order if these conditions are fulfilled. The suppliers then compete on design and price. NUTEK Energy arranges the tendering competition and supports the clients in purchasing at first series, thereby guaranteeing a set quantity. The market for white goods has reacted positively and today electricity efficient products already account for 5% of the market. In electric high frequency fittings for offices, the recommended technology is used in 30% of the cases.

Program requirements are voluntary purchasing standards giving examples of energy efficiency products and applications for a wide range of areas. For example, lighting, ventilation and office equipment. These voluntary purchasing standards are used within the incentive agreements.

Incentive agreements are signed with industrial companies, property administrators and energy utilities. These agreements are designed so that these companies are given an incentive to install more energy efficient equipment. Grants are available for covering a specified proportion of the additional costs that can arise when installing the more energy efficient equipment and fulfilling the program requirements. The resulting installations must be available for demonstrations. In 1995-96, 178 incentive agreements was formed, with a total economic value of SEK 192 million.

a The Government has labeled SEK one billion between 1991 and 1996 to be spent on promotion of efficient use of energy.


Technology procurement

Voluntary purchasing standards

Incentive agreements


Energy efficiency centers

A series of regional energy efficiency centers are being formed throughout the regions of Sweden. When fully functional, these offices will work with initiating and co-ordinating projects and disseminate information within two key areas: energy efficiency and alternative energy sources. As of June 1996 four offices are initiated, and more are underway. The EU is contributing with 50% (i.e., 200.000 ECU) of the first three years of operation. After this period the regional energy efficiency centers have to be functioning financially independent of this support. These offices are also co-operating and co-ordinating their activities with other European countries.

Utility Mechanisms

There is much hesitation with respect to DSM among companies awaiting the detailed rules and implications from the deregulation of the power sector. Competition is predicted to be aimed at larger customers and of cause they do not want to spend costs on these if the costs cannot be recovered.

The first phase of restructuring is price competition. According to the utilities interviewed, it will be some years before product variation will be considered along with the price. Thus, at present most distributors will be cutting back on DSM to achieve more competitive prices. It is still too early to judge if the price competition or the DSM competition will be the most demanded.

To ensure that some DSM activity takes place, the Swedish Department for Energy Efficiency (DOEE) has created a collaboration with 170 (out of 275) utilities who receives information and take part in regular meetings to keep themselves updated. Agreements have bee made with 30 of these companies to deliver DSM to their customers and 15 of them have started to do so. Demand for customer services such as, energy budgeting, control of energy use, and monitoring has increased more than the utilities expected and it is one of the services that the utilities have to build up. Competitive activities are constrained by uncertainties concerning meter availability and metering requirements.

These companies will then serve as spearheads for delivery of new technology which have been centrally produced such as washing machines, heat pumps, water heaters, heat control panels, solar heating, etc. They have also undertaken local procurement - mainly co-ordination of customer orders for efficient installations. There have been extended CFL campaigns making use of leasing agreements. Quite a few activities cover customer services such as budgeting and control of energy use and monitoring of operations as regards energy use. The



utilities in this collaboration have also been given the opportunity to extend their contacts to companies in the US and UK. Handshake projects are also of great importance in order to get impulses for new business concepts and of course for staff motivation in the companies.

3Pending Proposals and Key Future IssuesThe utilities feel that the most important reason for DSM not being realized in the marketplace is the variance in the amount of information that is available to decision-makers at the customer level. Some customers do, for example, not even know what their bill is and in most organizations energy responsibilities are not an integral part. Most small medium-sized customers are simply not aware of the opportunities for influencing the electricity costs.

Publicly owned utilities have a stronger incentive to do DSM than other utilities. “Göteborg Energi”, for example, is at the moment involved in a project to reduce customer load during peak hours and developing a program for promotion of intelligent buildings which will help customers save energy, time, and money. Göteborg Energi is aiming at becoming “total-deliverer” of resource saving energy solution through energy service agreements (i.e., performance contracting). The agreements intend to meet customer needs through providing customized solutions with respect to building, personnel, and machinery characteristics.

4References8.4.1Key Organizations and Contact Persons

Hans Nilsson, Energy Efficiency Dept., NUTEK, Stockholm, Phone: (+46) 8 681 9577; Fax: (+46) 8 681 9585

Anna Engleryd, Energy Efficiency Dept., NUTEK, Stockholm, Phone: (+46) 8 681 9577; Fax: (+46) 8 681 9585

Claes Lindroth, Stockholm Energi, Stockholm, Phone: (+46) 8 736 7000; Fax: (+46) 8 673 3986

Bo Lindörn, Electricity Market Dept., NUTEK, Stockholm, Phone: (+46) 8 681 9650; Fax: (+46) 8 681 19 68 26

Jonas Wilde, Vattenfall Utveckling AB, Vallingby, Phone: (+46) 8 739 5000; Fax: (+46) 8 739 5562

Key Literature

Elmarknad i förändring 1991; NUTEK B1991:6.



Energy Facts 1995; Energiläget 1995.

Energirapport 1994.

Energirapport 1995; NUTEK Analys; R1995:49.

Handel med el i konkurrens; Government Bill 1993/94:162 (summary in available in English "Summary Government Bill 1993/94 a competitive electricity trade").

Programmet för effektivare energianvändning 1993/94; B:1994:8.

Results and Potentials; NUTEK's Department of Energy Efficiency and The Energy Use Council; Draft January 1996.

Swedish Electricity Market 1995; NUTEK Analys.



9UNITED STATES

Overview

Some of the key issues facing the implementation of DSM and energy efficiency services in the USA include:

· Wholesale competition and industry restructuring — The Federal Energy Regulatory Commission has proposed new rules promoting wholesale competition. These rules would also establish new rules for pricing transmission, requiring owners of transmission facilities to provide access on a non-discriminatory basis and charge rates for transmission that apply to both the owner as well as user of the facilities. In addition, a number of State regulatory commissions (over 30) are investigating how the electric power sector could be restructured. The result of these changes is that utilities are far less interested in DSM and IRP;

· Marginal cost of capacity lower than average cost — In many regions of the US there is a surplus of generation leading to short-run marginal costs being less than average costs. In addition, technological advances in generation technology coupled with cheap natural gas have resulted in situations where the long-run marginal cost is less than average cost. Utilities in these situations are less interested in energy conservation strategies;

· Utility initiatives to minimize DSM rate impacts and retain customers — Due to the believe that retail competition in electricity is near, many utilities are very concerned about their competitive position in the market. DSM programs have traditionally resulted in higher rates (even though bills were lower) due to adjustments for lost revenues and recovery of program expenses. Utilities are now focused on cost management to lower rates and are not very interested in DSM programs that create upward pressure on rates;

· The regulatory nature of DSM conducted in the US DSM — has been primarily driven by regulatory pressure from statue regulatory commissions. Commissions have developed a number of mechanisms to promote utility interest in DSM, including special rate adjustments to collect program expenses, lost revenues, and an added profit incentive. Today, these mechanisms are not as successful in attracting utility interest as the concerns



regarding competition have caused utilities to focus on how to manage costs and reduce rates.


1Energy Demand The growth in electric demand varies from region to region but averages between 2%-3% per year. Electric sales in 1992 totaled 2,769 TWh, a slight reduction from 1991. Sales to the residential sector comprise about 35% of total sales, and sales in the commercial and industrial sectors represent 31% and 34% respectively.

2Projected Needs for New Energy Resources and CapacityMost regions of the country currently face a situation of surplus capacity, with reserve margins typically above 20%. Coal-, oil-, and gas-fired plants collectively accounted for nearly 53% of generation output in 1992 and nuclear power accounted for about 21%. Hydropower represented 9.2% and renewables less than 1%. It is expected that both renewables fuels and gas-fired plants will increase their market share over the next 15 years.

3Industry Structure, Market Type, Regulation/CompetitionMost of the largest electric utilities in the US are investor-owned. In addition, there are a number of Federally-owned power marketing agencies (which serve as wholesalers of power) as well as publicly-owned utilities (which generally tend to be distribution companies). One complicating factor is that investor-owned and publicly-owned utilities do not face the same regulation. While investor-owned utilities are generally regulated by the State regulatory commission, publicly-owned utilities are generally exempt from State regulation. Investor-owned and publicly-owned utilities are granted exclusive rights to serve a designated territory and face an obligation to serve all retail customers within their service territory. The investor-owned utility’s retail rates are regulated by its State public utility commission and rates based largely on the utility’s cost of service. In addition, wholesale power sales and transmission pricing is regulated at the Federal level by the Federal Energy Regulatory Commission.

Competition exists at the wholesale level among US utilities and some States are approving retail competition on a limited basis. A large number of State regulatory commissions have opened



investigations into competitive restructuring issues for electric utilities but there is very little co-ordination between State and Federal agencies. The Federal Energy Regulatory Commission has proposed that utilities must grant competitors access to their transmission lines at a price comparable to what they would charge themselves for the same service, a move designed to promote increased wholesale competition.

Competition exists for construction of new generation facilities.a Most States have adopted some sort of IRP process that includes requirements that when a need for new capacity is identified, some sort of competitive acquisition process be used to select the new resource. These processes are generally run by the utility with oversight from the State regulatory commission. In some cases, the utility is not allowed to participate in the bidding process.

While competition for new facilities does exist, full competition in wholesale power has remained limited. Under the Energy Policy Act (EPACT) of 1992, exempt wholesale generators were allowed. These plants are merchant plants that can sell their output to any distributor. EPACT requires that utilities wheel power. However, many transmission tariffs as well as the conditions under which transmission capacity were made available has served as an effective constraint to trade. The FERC is developing new rules that would effectively treat transmission as a common carrier and would price transmission service in such a manner that it would not serve as a barrier to trade.

Price-cap or performance-based regulation is beginning to replace rate-of-return or cost-of-service regulation for the distribution function. In the proposed competitive markets, regulation of the generation sector would be limited to prevention of monopolistic pricing and ensuring compliance with safety and environmental standards.

Retail competition, when it is introduced, is likely to take one of two forms: bilateral contracts or a power pool (PoolCo). The bilateral contract market would be characterized by transactions arranged directly between individual buyers and sellers at a a In fact, competition for construction of new facilities can be directly traced to the Public Utilities Regulatory Practices Act (PURPA) of 1978 which required the utilities to buy power from qualifying cogenerators and small power producers at avoided cost. PURPA established a standard for payment for non-utility generated power (avoided cost) and as a result a large number of non-utility generation plants were constructed. It was the success of these entities in constructing these plants, often for far less than the plants the utility was constructing, that led policy makers to conclude that competition for construction of new facilities was not only possible but desirable.



mutually agreed price. The PoolCo model involves an independent pool operator to whom generators sell power and from whom buyers purchase power. The market clearing price is determined through the pool. Consequently all buyers pay the same price and all sellers receive the same price. Under these two scenarios, the vertically integrated utilities would likely be unbundled along functional categories (i.e., generation, transmission, distribution).

The California Public Utilities Commission recently released a proposed policy decision advocating a PoolCo model to be introduced in January, 1997. This proposed policy decision does not allow customer choice of supplier, but does envision that customers could develop contracts for differences to manage price risk from the pool. These contracts for differences would be entirely outside of the commission’s purview. The pool would assure that all market participants have non-discriminatory access to the region’s transmission grid. Ratepayer funding would continue for DSM and DSM would be offered either by the utilities or by another institution responsible for managing and allocating the moneys raised for DSM. IOUs in California have agreed that about 3 percent of their revenue should be allocated to social programs (including DSM) within their service territories. A number of modifications are expected as parties and legislative bodies continue to comment on the proposal. A final ruling is expected by the end of 1996.

13Table 8 Overview of US Power Sector Reforms.

Massachusetts Rhode Island Wisconsin California

Generation resource mix

Coal (37%)

Petroleum (35%)

Natural gas (14%)

Nuclear (14%)

Petroleum (49%)

Natural gas (51%)

Coal (71%)

Nuclear (23%)

Hydroelectric (4%)

Petroleum (1%)

Natural gas (49%)

Nuclear (27%)

Hydroelectric (18%)

Renewable (5%)

Industry structure

Vertically integrated




Industry ownership

8 investor-owned

40 municipal

4 investor-owned

1 municipal

11 investor-owned

82 municipal

4 investor-owned

25 municipal

3 co-operatives



Massachusetts Rhode Island Wisconsin California

2 NUGsa 27 co-operatives 3 public power

districts

6 NUGs

Market structure

Franchise service areas




Regulation Primarily rate-of-return

Primarily rate-of-return



Key objective behind restructuring

Lower rates Lower rates Lower rates

Lower cost of regulation

Lower rates

Lower cost of regulation


1Overview and Background

Historical DSM and energy efficiency activity

Demand-side management has traditionally been seen as an alternative to costly supply side resources, a mechanism to help improve the environment, and (more recently) a utility customer marketing and customer retention strategy. In 1990, electric utilities in the US achieved on the order of a 20 GW reduction in peak demand and energy savings of 15,000 - 19,000 GWh as a result of DSM programs. In a competitive environment, energy efficiency goals will increasingly be realized through standards and information programs that are not likely to be implemented by utilities but by government or consortiums.

Investor-owned utility DSM budgets are shrinking dramatically in many States including traditional DSM leaders such as California, Massachusetts, and New York. Utilities are requiring DSM participants to pay a greater share of DSM program measure costs and are beginning to rely more heavily on government-mandated programs such as product labeling and energy efficiency standards as well as market transformation programs. Some utilities, regulators and third-party intervenors have called for a DSM surcharge in competitive retail markets where moneys raised would be earmarked for cost-effective DSM programs carried out by either utility or non-utility agents.

a Non-Utility Generating Companies



The reduction in utility DSM spending is part of a larger, industry-wide effort to cut costs and brace for increased competition. Cost-cutting is taking place in the public sector as well, as evidenced by proposed budget reductions at the US Department of Energy and in New York where the State Energy Office, the office responsible for producing the energy forecast, was eliminated.

Key Barriers to DSM and energy efficiency

Lack of capital was cited by government, utility and third-party respondents as the most significant barrier to private implementation of energy efficient technologies. A New York utility which offers industrial customers the option not to participate in DSM recently studied the reasons customers chose not to participate. The majority of respondents cited a lengthy payback period as a reason not to participate. Several other respondents indicated a lack of capital as a main reason influencing their decision not to participate.



Approach to collecting information

Information has been assembled based on review of documents and interviews with US regulatory staff and energy efficiency advocates in states known to be considering specific mechanisms for implementing energy efficiency in a restructured electricity market. Information is reviewed on the leading mechanisms being considered in seven jurisdictions:

· California

· Massachusetts

· New Jersey

· Rhode Island

· Washington/Idaho

· Wisconsin.

Note that these mechanisms may or may not be indicative of the types of energy efficiency program mechanisms, if any, that may result in states not analyzed for this effort.

The proposed mechanisms showed considerable similarities. In particular, most suggested the use of a “non-bypassable, non-discriminatory wires charge” to fund energy efficiency activities, usually to be levied on each kWh purchased and to be collected by the distribution utility.a Three types of implementing organizations are suggested ¾ the distribution utility (often with a requirement that there be no financial ties to a generating company), an independent non-profit organization (existing or to be created), or an existing government agency (the public service commission or some other agency). The types of programs to be implemented varied across jurisdictions, though market transformation activitiesb were usually suggested and

aA non-bypassable, non-discriminatory wires charge is one that is levied on all purchases of electricity, regardless of the supplier of that electricity. The use of such a charge ensures that the funding source for energy efficiency activities does not cause the electricity price of one energy provider (e.g., utility) to be higher or lower (more or less competitive) than that of another energy provider, merely because one utility must add the charge to its price while the other does not. In short, the charge cannot be bypassed by an energy provider, and it does not favor one provider over another.b”Market transformation programs,” in these proposals, refers to activities targeted at removing market barriers to energy efficiency in a way that changes that market, so that similar efficient decisions will be made without further intervention. This is in contrast to programs that



high rebate programs were sometimes explicitly excluded. However, there was little comment on the relationship between the objectives of publicly funded energy efficiency in a competitive environment and the particular types of programs appropriate to each type of objective.a

All jurisdictions included stakeholders who argued for allowing the market, and only the market, to determine the types of efficiency investments customers made, i.e., they argued that there should be no publicly funded energy efficiency activities. This viewpoint is excluded from the discussion below, which deals with methods for funding and implementing publicly funded activities.

Table 9 summarizes the main mechanisms proposed for funding and implementing energy efficiency activities under a restructured (i.e., competitive) utility industry or the transition to it.

14Table 9 Summary Of Proposed Energy Efficiency Mechanisms.

Mechanism Attribute Options

Funding Mechanism · Non-bypassable, non-discriminatory wires charge levied on all or all but largest customers

· Non-bypassable, non-discriminatory wires charge levied on all customers of all fuel types

· General tax revenues

· Tax on all energy providers (all fuel types)

Implementing Organization · Distribution utility

seek to acquire efficiency on a customer-by-customer basis ¾ for example, through offering rebates for efficient purchases ¾ but have little or not effect on the energy-related decisions of those who do not directly participate in the program (e.g., those making energy-related decisions after the program has ended). It should be noted, however, that, in the past year or two, the term “market transformation programs” has at times referred also to any programs that do not offer rebates and to programs that have even minimal permanent effect on the market. Clarification of the definition will likely occur as more market transformation programs are designed and implemented.aSee “Ratepayer-Funded Energy-Efficiency Programs in a Restructured Electricity Industry: Issues, Options, and Unanswered Questions,” by J. Eto et al, Lawrence Berkeley National Laboratory, March 1996 draft paper for the ACEEE 1996 Summer Study on Energy Efficiency in Buildings, for a discussion of this issue.



Mechanism Attribute Options

· Independent, non-profit organization

· State agency

Types of Programs Funded · Market transformation

· Programs targeted at all but large commercial and industrial customers

· Focus on programs targeted at commercial and industrial customers

· Customer and vendor education

· Energy efficiency business start-up assistance

· Training

· Research, development and demonstration

· Renewable resource programs

· Emissions reduction activities

· Lost opportunity programsa

· DSM bidding and Standard Offerb initiatives

· Codes/standards development and enforcement

Time Frame for Activities · Only during the transition to full competition

· Only for a specific number of years

· For transition period, with sunset review to determine future need

· Only until competitive energy efficiency markets exist for all customer segments

· Ongoing

aLost opportunity programs are those that attempt to influence time-bound, energy-related decisions (e.g., new construction equipment selection or insulation, replacement of failed equipment), rather than decisions that might occur at any time (early replacement or retrofit decisions, e.g., lighting changeouts).bSee New Jersey profile in the next section.



2Profile of Existing Mechanisms and Existing and Pending ProposalsThe following pages present profiles of the leading mechanisms being considered for encouraging energy efficiency in a restructured utility environment. In some cases ¾ California, New Jersey and Wisconsin ¾ more than one option is presented for a single jurisdiction.

15Table 10 Profile of Existing Mechanisms and Existing and Pending Proposals

CALIFORNIA (OPTION #1)

Objectives of Mechanism No objectives specified in materials reviewed

Funding Mechanism Non-bypassable, non-discriminatory wires charge, initially to be funded at current DSM levels

Energy-efficiency is only one of the activities to be funded through this charge.

Implementing Entity Managed by an independent, non-profit entity (after a transition period)

Distribution utilities with any financial ties to generating companies would not be eligible

Program/Initiative Types Residential and small commercial customer education programs

Market transformation programs


Objectives of Mechanism No objectives specified in materials reviewed

Funding Mechanism Non-bypassable, non-discriminatory wires charge to be levied on all customers

Implementing Entity · Co-ordinated by a state agency

· Implemented by utilities, energy services providers, and public-private consortia

· Use a portion of funds to establish a market transformation organization after restructuring is complete




Program/Initiative Types · Focus on total fuel cycle and indirect impacts

· Market transformation activities

· Programs that defer investments in distribution facilities

MASSACHUSETTS

Objectives of Mechanism No common objectives stated

Funding Mechanism Non-bypassable, non-discriminatory wires charge:

· Access charge, to be collected by distribution companies

· Funding set at current levels for utility DSM activities (about US$ 0.03-$0.04/kWh)

Implementing Entity Distribution utility because they have experience and have performed well in the past

Program/Initiative Types · Should evolve toward market transformation and lost opportunities programs and away from high-rebate programs

· Should evolve to fit market needs

Comments Agreement that programs will continue through the transition period, but no agreement that they will necessarily continue after the transition

NEW JERSEY

Objectives of Mechanism · Encourage efficient use of energy. If the market is found to be inefficient, consider State involvement.

· Use market forces to the extent possible to achieve efficiency goals.

· When comparing benefits and costs of supply- and demand-side options, use the same criteria, test or measurement (e.g., incorporation of externalities).

· Design DSM programs that do not give individual market players a competitive advantage.

Funding Mechanism



NEW JERSEY

Option #1: Non-bypassable, non-discriminatory wires charge

· Both fixed and variable components

· Allow for different charges to different customer classes (e.g., backup customers pay larger fixed portion than do users taking service over the distribution system

Option #2: · General tax revenues, so that costs are borne by all fuels (not just electricity), market distortions are minimized, and cost accountability is assured

· Tax should be limited and be of similar magnitude to charges in other states

Option #3: Tax on the sale of electric power by any entity, paid by the energy providers

Option #4: All-fuel non-bypassable/non-discriminatory charge

Implementing Entity Implementation of a Standard Offera (or other market-based competitive delivery system) approach by:

Option #1 · Distribution utilities, under an industry structure that makes DSM as profitable as increased sales

Option #2 · A third-party organization

Program/Initiative Types · “Core” programs (e.g., energy audits, low-income weatherization, and new construction design

· DSM, renewable energy resources, research and development programs, and low-income and universal service programs; existing programs to be re-evaluated in light of market-driven DSM

· Standard Offer and DSM bidding initiatives

· Codes and standards, and their enforcement

aThe Standard Offer approach is one in which a maximum price/kW of savings is set and companies present projects to provide specific kW amounts. Standardized verification protocols are also used.



RHODE ISLAND

Objectives of Mechanism Based on:

· Existence of persistent market barriers/failures (lack of capital, time, and information; long paybacks; and split tenant/owner decisionmaking/incentives)

· Cost-effective DSM is a least-cost resource.

· Energy savings lowers bills in short run (participants) and long-run (all customers), and helps increase productivity and competitiveness of participating customers.

Objectives:

· Reduce electricity costs and bills.

· Reduce market barriers and promote market transformation.

· Reduce environmental impacts of generation, transmission and distribution.

· Maintain/promote a viable DSM infrastructure.

· Capture lost opportunities.

· Promote new energy-efficient technologies.

· Promote efficient transmission and distribution facility investments

Funding Mechanism Non-bypassable, non-discriminatory wires charge: Access charge, with funding at current DSM levels (about US$0.002 - $0.0035/kWh), to be collected by the distribution companies

Implementing Entity Distribution utilities

Program/Initiative Types · Market transformation programs and other cost-effective programs designed to minimize non-participant rate impacts (e.g., reduced or no rebates)

· Determined through a collaborative process (i.e., all stakeholders)

Comments · For transition period to retail competition.

· Full review of utility DSM should be conducted at end of transition period, to identify appropriate role of utility DSM investments after the transition.



WASHINGTON WATER POWERa (Operating in Washington and Idaho)

Objectives of Mechanism · Maintain continuity in delivery of energy efficiency during transition period to competition.

· Provide long-term resource diversity.

· Recognize timing of resource needs.

· Promote transformation of consumer markets to energy efficient choices.

· Provide valued services to customers

Funding Mechanism Distribution charge

Implementing Entity Utility

Program/Initiative Types · Determine activities with regulatory staff.

· Programs that require participants to pay a greater share of total costs

· Focus on increasing participation from commercial and industrial customers.

· A few programs available to broad customer groups, but the rest targeted at market transformation of specific market niches

· Evaluation of program impacts required

Comments Distribution charge has been implemented.

WISCONSIN (OPTION #1)

Objectives of Mechanism Transform the market so that it can sustain itself without government or utility intervention

Develop alternative means of funding and providing social benefits to customers, including low-income protections and programs, energy conservation and efficiency services, and expanded opportunities to use renewable energy supplies

aThese data represent one utility’s mechanism, developed in coordination with its regulators, not a negotiated mechanism reflecting all stakeholders’ opinion, statewide.




Funding Mechanism Non-bypassable, non-discriminatory wires charge: Access charge, with funding at current DSM levels (about US$78 million), applied to all but large commercial and industrial customers

Implementing Entity · Implementation by existing agency (e.g., PSC or Wisconsin Energy Bureau), to be overseen by an advisory board, and to determine where services are to be rendered

· Specific program implementation by contractor selected through competitive bid process

Program/Initiative Types · Programs targeted at all but the large commercial and industrial customers (who already have access to competitive efficiency services)

· Programs to include customer and vendor education, new business start-up capital, training, targeted incentives and other market transformation activities.

· Research needed by implementing agency, to determine target markets, how to define those markets, and how to tell when market is transformed

Comments · For transition period to retail competition only

· Explicitly links low-income, energy conservation and renewable energy activities


Objectives of Mechanism · Increased competition for delivering DSM services in the open market

· Competitive acquisition of DSM resources within a fund (see below)

Funding Mechanism Non-bypassable, non-discriminatory wires charge:

· Percent-of-revenues fee at the distribution level

· Funding set at current levels for utility DSM activities (about US$147 million).




Implementing Entity · Implementation by existing agency (e.g., PSC or Wisconsin Energy Bureau), to be overseen by an advisory board

· Specific program implementation by contractor selected through competitive bid process

Program/Initiative Types · Programs targeted at all customer classes

· Use integrated resource planning to provide energy-efficiency goals and define nature and level of future programs.

· Include energy efficiency; research, development and demonstration; renewable resources; and other environmental efforts.

Comments · Ongoing review of funding level and the need for any fund at all, based on strategic analysis of market transformation and “stranded societal benefits”

· Explicitly links energy efficiency with renewable energy; energy research, development, and demonstration; low-income services; and other environmental efforts.


Objectives of Mechanism To be determined through an open, public process

Funding Mechanism Non-bypassable, non-discriminatory charge, to be determined through an open, public process

Implementing Entity · Non-utility, third-party fund administrator selected by PSC to manage services provided by competitively selected vendors.

· PSC oversees collection and disbursement of funds and of specific activities to be conducted.

· Evaluation administrator selected to assess program performance




Program/Initiative Types To be determined through an open, public process. Most likely:

· Initially focus on residential market; other markets to be pursued as fund administrator gains experience

· Would eventually include all customer classes

· Include renewable resources and emissions reduction strategies

3Future Issues — Areas of Agreement and DisagreementThere remains considerable debate over whether barriers exist in the energy efficiency market that prevent consumers from investing in energy efficiency. Traditional barriers have included imperfect information, the long payback periods associated with energy efficient technologies, and the perceived risk of energy efficient technologies. However, in competitive electricity markets, many economists and policy-makers argue that the private sector - through energy service companies (ESCOs) and other third parties - will have a strong incentive to pursue energy efficiency opportunities and that the payback gap between private investment decisions and utility resource investments will diminish as utilities shorten their payback criteria through use of plants with shorter lead times and purchased power contracts.

Currently, there are a number of studies examining whether and how DSM can be promoted in a restructured electric power sector. In addition, several State regulatory commissions are examining this issue in conjunction with the discussion on restructuring their power sectors. Most advanced along these lines are the proposals in California that 1) public interest DSM programs continue, 2) a surcharge on bills be used to continue funding of these programs, 3) that a consortium manage the funds, and that 4) utilities may, or may not, be involved in these DSM initiatives.

Should Energy Efficiency Activities Be Publicly Funded in a Competitive Market?

The most basic area of disagreement among parties discussing the nature of energy efficiency in a restructured electric power industry is over whether there should be any publicly funded



energy efficiency in a competitive electric power market. Proponents of publicly funded energy efficiency typically cite the existence of market failures (e.g., lack of capital, time and information, inability to incorporate the cost of environmental externalities into electricity costs, or long paybacks for ultimately cost-effective measures) which justify intervention into the market place, so that energy efficiency can effectively compete with power supply options. Detractors have usually claimed that the market place is the best judge of what activities are cost effective. Some detractors have proposed allowing the restructured market to exist for a period of time and only intervening with publicly funded activities if a clear need emerges.

It is likely that some US jurisdictions will decide that publicly funded energy efficiency is not appropriate, while others will decide that it is. However, even in jurisdictions with publicly funded activities, there is likely to be a contingent of groups opposing any activities whatsoever.

Funding Mechanism

Of the jurisdictions analyzed, the most common area of similarity was that a non-bypassable, non-discriminatory charge ¾ also called a “systems benefit charge” or “wires” charge ¾ be used to fund energy efficiency activities. Under such a funding mechanism, each kWh of electricity sold within the jurisdiction would include a small charge for energy efficiency activities. By placing the charge on the distribution system, “the responsibility for these benefits would be shared by all competitive providers of generation.”a In several of the jurisdictions this funding mechanism has either been agreed upon or is the most likely option to become part of the jurisdiction’s restructuring plan. The great advantage of this funding approach is that it does not favor or disadvantage any supplier of energy; it is neutral to all power suppliers.

Arguments against the wires charge typically are of four types:

· It would not really be non-bypassable.

· It represents cross-subsidization.

· It is undemocratic.

· It should include all fuels.

aComments of Working Group 4: Public Policy Issues, Energy Master Plan - Phase II, submitted to the New Jersey Board of Public Utilities, March 8, 1996, pg. 31.



The first argument against the non-bypassable, non-discriminatory charge is that it may not really be “non-bypassable.” Customers (especially large customers) can move to another state, become wholesale customers, self-generate, or develop transmission to a nearby independent generator. This argument notes that a wires charge “is probably workable if it is small and if it is largely a fixed charge (proportional to the customer’s initial electricity bill).”a However, there is a concern that the wires charge would also have to carry charges for the stranded costs and benefits of utilities making a transition to competition, and that the resulting total charge would be large enough to motivate customers to find ways to avoid it.

Another argument against the wires charge is that it represents a cross-subsidization by one class of customers for benefits to be delivered to another class customers. Typically, large industrial customers would use this argument, stating that they have already made all cost-effective energy efficiency improvements, and therefore paying a wires charge would benefit only smaller customers.

Others would argue that public policy energy efficiency activities should be funded through taxes. Specifically, this argument notes that if the activities do indeed meet public policy objectives, funding decisions should be made by a public, democratically elected entity. As one New Jersey group put it, “It is the legislature that is charged with reflecting the public will, and is therefore accountable for expenditures made for the social programs to be funded.”b

Some argue against the idea of a wires charge specifically and only the grounds that it favors non-electric fuels over electric power. Proponents of this point of view favor a charge on the sale of all types of energy or on “all forms of greenhouse gas emissions according to their relative contribution.”c Detractors argue that (1) electricity service is similar to telephone service in that access to electricity service is essential and virtually universal in industrialized societies, and that (2) electric power production pollutes. Therefore, electricity service is the appropriate vehicle for collecting funds to be used in reducing aIbid, pg. 33.bIbid, pg. 31.cSee “Weighing Environmental Externalities: Let’s Do It Right!” by P. Joskow, The Electricity Journal, Volume 5, Number 4, pp. 53-67, for a discussion of this viewpoint, based on economic theory. Also see “Ratepayer-Funded Energy-Efficiency Programs in a Restructured Electricity Industry: Issues, Options, and Unanswered Questions,” by J. Eto et al, Lawrence Berkeley National Laboratory, March 1996 draft paper for the ACEEE 1996 Summer Study on Energy Efficiency in Buildings, for a more in-depth discussion of this issue and other related issues.



greenhouse gas emissions, which will produce benefits to all customers.

Implementing Entity

The entity being proposed to implement energy efficiency programs and initiatives under or during the transition to a more competitive utility market are of three general types:

· Distribution utilities

· Independent, non-profit organizations

· State agencies

Distribution utilities have been proposed as the appropriate implementors of energy efficiency programs, primarily in some of the states with a successful history of utility DSM. The assumption here is that there will be a financial, or at least functional, separation of generation from distribution, so that the distribution companies would not be subject to a conflict of interest (using efficiency funding to better position a related generation company).

Many utilities have a high level of expertise and long history of experience in implementing DSM/efficiency programs. However, there are concerns about possible conflicts of interest, the lack of a real self-interest in efficiency on the part of distribution utilities, and the possibility that many programs to be implemented, such as market transformation programs, will require a different type of program administration, development, and implementation skills which utilities currently may not have.

Several state proposals specify that an independent, non-profit organization or corporation be responsible for implementing the programs. The role of such an organization is generally viewed as an administrative one in which the organization develops contracts with individual firms or organizations that would compete to implement specific program initiatives. Sometimes, distribution utilities are included as possible implementors that would contract with the overseeing organization. One of the proposals specifies that distribution utilities with ties to generation companies would not be eligible to receive energy efficiency program funds.

With the establishment of an independent, non-profit organization, it may be easier to obtain a high level of expertise and experience in the precise types of skills appropriate to implementing many of the new types of programs (e.g., market transformation) likely to be funded in the more competitive



environment. The implementors might also be more likely to be strong advocates of the programs they would be administering, and not subject to the type of split motivation utilities have experienced in the past. However, such an organization might have to learn to work with regulatory staff, an area in which utilities have extensive experience, and such organizations are likely to be subject to a whole host of issues and problems not yet conceived of by those with extensive experience in utility DSM.

The third major option is to use existing state agencies, such as the state energy office or the public service commission. Typically, this agency would play a role similar to that of the independent, non-profit organization mentioned above, contracting out program implementation on a competitive basis. The advantages of a state agency are that it already exists, its motivations are likely to be congruent with the program objectives, and there may be considerable expertise in efficiency program issues and design among agency staff. However, some may question whether a state agency can be agile enough and responsive enough to the market to effectively implement programs requiring close co-ordination and consideration of market forces (i.e., market transformation programs).

Program/Initiative Types

Discussions of program types have generally been seen as at a more specific level of detail than other, more overarching issues such as how and whether to fund energy efficiency and the appropriate agents to implement efficiency programs. To date, most of the discussion about program types has reflected concerns that:

· Certain customer classes with limited access to competitive energy efficiency services ¾ generally low-income and/or residential and small commercial customers ¾ should be targeted for publicly funded efforts.

· Programs should address specific market barriers, i.e., market transformation programs should be strongly encouraged.

· Programs should not “get in the way of the market” which may be willing and able to provide many energy efficiency services by itself.

These concerns do not necessarily reflect different points of view, and there seems to be an increasing consensus about them.



Duration of Publicly Funded Energy Efficiency Programs

As noted earlier, there is considerable disagreement among the various stakeholders involved in the US restructuring debate as to whether publicly funded energy efficiency should continue beyond the period of transition from the regulated utility environment to a more competitive one. Generally, there are three viewpoints in the debate:

· Implement publicly funded energy efficiency programs only during the transition to competition.

· Implement publicly funded energy efficiency programs indefinitely.

· Implement publicly funded energy efficiency programs during the transition to competition and then re-evaluate whether such programs are needed in the competitive environment.

Of these positions, the strongest consensus is that publicly funded efforts are needed for the transition period.

4References


Massachusetts — Paul Gromer, Massachusetts Energy Efficiency Council (617/367-6144) and Theo MacGregor, MA Board of Public Utilities (617/727-9748)

Rhode Island — Mary Kilmarx, RI Public Service Commission (401/277-3500)

Wisconsin — Ralph Prahl, Public Service Commission of Wisconsin (608/266-7407)

California — Don Schultz, CA Public Utilities Commission (916/324-5935)

New York — Bill Saxonis, NY Public Service Commission (518/486-1610)

Key Literature

Washington Water Power: Distribution Charge and Market Transformation Programs, Profile #126, The Results Center, published by IRT Environment, Inc., 1996.

“Proposals for the Future of Energy Efficiency,” by Lester Baxter, Oak Ridge National Laboratory, The Proceedings of the



1996 ACEEE Summer Study on Energy Efficiency in Buildings, Panel 7, Energy Efficiency and the Utility of the Future.

“Social Goals and Electric-Utility Deregulation,” by Eric Hirst and Bruce Tonn, Oak Ridge National Laboratory, Issues in Science and Technology, Spring 1996, pp. 43-47.

Justification for Electric-Utility Energy-Efficiency Programs, by Eric Hirst (Oak Ridge National Laboratory) and Joseph Eto (Lawrence Berkeley Laboratory), ORNL/CON-419, August 1995.

Various utility filings and commission orders in the states of California, Wisconsin, New York and Massachusetts.


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