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Practical Approaches to Benefit-Cost Challenges in Energy Efficiency Programs

Kansas Corporation CommissionMitchell Rosenberg, Vice President

Topeka, Kansas

March 26, 2008

2

Overview

Practical Approaches and Results

– Formulating cost-effectiveness tests to address a jurisdiction’s policy objectives: Expanding the Total Resources Test (TRC)

– Estimating benefits not included in the TRC– Selection of appropriate analysis periods and discount

rates to reflect policy objectives and specification of benefits

References

– KEMA work in Wisconsin

3

Policy Drives the Test

Total Resource Test

– Meet energy needs at lowest social cost, including environmental externalities

Wisconsin Goals for Energy Efficiency Programs

– Reduce energy used per unit of production– Improve energy reliability– Enhance economic development & competitiveness of WI

businesses– Reduce environmental impacts of energy use– Expand ability of market to deliver energy-efficient goods &

services– Deliver return on public investment

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Wisconsin Approach: Test Structure

Analysis Component TRC Societal

Test

Simple BC

Test Expanded BC Test

Economic Impact

Benefits Counted Avoided supply costs of kWh, kW, therm X X X X X Avoided emissions costs included in electric delivery X X X X X Avoided externality value of market-valued emissions costs associated with customer gas use X X X X Avoided externality value of projected market value of emissions costs associated with electricity delivery X X Avoided externality value of projected market value of emissions costs associated with customer gas use X X

Non-Energy Benefits resulting in monetary flows ("economic") X X X

Non-Energy Benefits not resulting in monetary flows ("non-economic") X Secondary economic benefits X X X

Tax credits treated as reduction in customer costs X

Discount rate utility societal societal societal not

applicable

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Wisconsin Approach: Other Elements

Analysis Period: 25 years, beginning 2001

– Needed to capture economic benefits Program Period: 10 years, beginning 2001

– Need to assume levels of program activity from 2007 – 2011

Two funding scenarios

– Low-funding: continues first 5 years– High-funding: spending increase per current legislation.

More market effects reflected in benefits Net Present Value: All benefit and cost streams

discounted to $2007, then netted.

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Wisconsin: Overview of Benefit-Cost Analysis Results

Business Residential Renewables Total % of Total

BENEFITS BY CATEGORY

Documentable Energy Savings $1,373 $658 $91 $2,122 40%

Added Market Effects $80 $95 $ - $175 3%

Economic Envt'l Externalities $45 $32 $3 $80 1%

Non-Econ. Envt'l Externalities $122 $68 $9 $199 4%

Non-Energy Benefits $399 $106 $44 $549 10%

Economic Impacts Adder $1,557 $459 $219 $2,235 42%

SUMMARY BENEFITS

Total Simple Benefits $1,498 $785 $94 $2,377 44%

Net Economic Impacts $3,454 $1,350 $357 $5,162 96%

Total Expanded Benefit $3,577 $1,418 $366 $5,361 100%

COSTS

Program Costs $145 $87 $14 $246 24%

Incremental Customer Costs $338 $382 $42 $762 76%

Total Costs $483 $469 $56 $1,008 100%

In $2007 millions

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Benefits under the Simple TestCOMPONENTS/Functional Definitions/Inputs and Other Details

‘DOCUMENTABLE ENERGY SAVINGS’ AVOIDED SUPPLY COSTS Forcasted net energy savings under two spending scenarios

Evaluation results: net energy savings per dollar of program expenditure

Forecast of program spending

Measure life and decay rates annual savings stream over 25 years

Avoided utility energy cost per unit: kWh, peak KW, therms

MARKET EFFECTS SAVINGS AVOIDED SUPPLY COSTS Savings associated with program market effects

Low-funding case: market effects documented in program evaluations and counted in program achievements to date. Mostly ‘outside of program’ CFL sales and spillover estimated in impact evaluations. Forecasted per dollar of program spending.

High-funding case: Additional market effects based on evaluation findings that are less certain. E.g. effect of retailer promotion on permanent market share gain for CFLs; spillover from promotion of high bay fluorescent fixtures, efficient motors, and efficiency practices in the Pulp and Paper Industry.

ECONOMIC ENVIRONMENTAL EXTERNALITIES Market value of avoided emissions of criterion pollutants: NOx and SOx.

Annual kWh and therm savings: historical and forecast

Historical emissions data from EPA to estimate past avoided emissions.

Forecast emissions from marginal producers from regional Multi-Pollutant Optimization Model Generation emissions factors for energy saved in out years.

Natural gas on-site use emissions factors for non-generation boilers, per boiler size.

Emission allowance prices: Historic and forecast prices generated by the Multi-Pollutant Optimization model.

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Non-Energy Benefits

Estimates developed from combination of surveys to assess incidence and secondary sources to assess unit values.

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Indirect Economic Impacts Modeling

Direct Program Effects

Economic Benefit Drivers

Benefits Counted

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Estimates of Economic Development Impacts

Note: Benefits not discounted in Sum columns.

Import substitution and increased business competitiveness are the primary drivers of economic benefits generated.

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Putting it together: Simple Test

-40.0

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02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

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$ M

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Documentable Energy Savings

Added Market Effects Savings

Economic Envt'l Externalities

Program Costs

Incremental Costs

Net Benefits Simple B/C

Residential Programs: High Funding Scenario

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Putting it together: Expanded Test

Residential Programs: High Funding Scenario

-40.0

-20.0

0.0

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80.0

100.0

120.0

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

Year

$ M

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Documentable Energy Savings Added Market Effects Savings Economic Envt'l Externalities

Non-Econ. Envt'l Externalities NEBs Economic Impacts

Program Costs Incremental Costs Net Benefits Expanded B/C

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Key elements of uncertaintySources of Uncertainty

Issue/Treatment

Potential Improvement

Effect on Uncer- tainty

Ability to

Improve

End-user incremental cost

Often not tracked by programs. Used combination of program tracking and survey data.

Collect and review incremental costs in program tracking system; verify in impact evaluations.

H M

Avoided costs of energy

Based on recent tariff filings and market data. Electric costs not specific to sector or measure load shapes.

Develop electric avoided costs that vary according to time of day – as done in CA.

H M

Measure life and decay rate

Based on available literature. Projections assume exponential decay to mean lifegime.

Revise based on measure life studies in various jurisdictions. M M

Trends in savings per program $

Future assumed similar to historical. Limited information available for modifying assomptions

M L

Future energy savings

Scaled historical results or near-term projections based on assumed funding levels.

Modify for known changes in program emphasis. M L

Future Incentive payments

Scaled historical patterns based on projections of total spending.

Modify for known changes in program emphasis.

M L

Non-energy benefits

Estimates include a wide range of assumptions and imported values.

Improve analysis as possible. M L

Externality values Used trading credits for SOx and NOx; projected values for CO2

Refine market analysis as more trading info becomes available

M L

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Lessons Learned Extended cost-effectiveness framework is analytically

manageable, with significant areas of uncertainty remaining

Extended cost-effectiveness creates considerable program ‘headroom’.

Incremental cost data a major weakness.

– Need to build cost data collection into program operations and evaluation

Must ensure that assumptions used in b-c calculations are incorporated into program planning

– Example of California’s E3 calculator