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DSM Utility and Societal Cost Tests

By April 3, 2012December 26th, 2021Briefs
DSM Utility and Societal Cost Tests, Michaels Energy

Here we go again. Today we’ll discuss the DSM Societal Test and the Utility Cost Test, finishing up our definition of the various ways to measure the cost-effectiveness of DSM programs.

Utility Cost Test

The Utility Cost Test is sometimes referred to as the Administrator Cost Test. This test determines whether a DSM program or portfolio is cost effective from the utility’s perspective. It measures the benefits of a program or portfolio of programs with respect to the cost of achieving those benefits. It provides the perspective of the program as a resource for the utility in planning present and future resources to meet customer demand for energy. The result of the test is usually expressed as a net present value or ratio of the life time savings and costs. Simply put, this test balances supply delivery with demand side management.

The benefits include the avoided cost of acquiring energy and the monetized deferral of pant investments. The latter includes transmission and distribution if they can be quantified for the program or portfolio being analyzed. The costs include the total costs to deliver the program/portfolio. This includes program costs such as administration, incentives, marketing, and channel management. It does not include participant costs.

This is an important test because it demonstrates the benefit to the utility of the program/portfolio. If the benefits are not larger than the costs, the program/portfolio will have net impact of raising revenue requirements and thus rates over the long term. Thus, this test is sometimes called the revenue requirements test.

One of the strengths of the Utility Cost Test is its applicability to address many types of programs, such as fuel switching and renewable energy. As such, it treats revenue shifts as transfer payments. The result is that although these transfer shifts may impact rates for the rate class, they may not impact overall revenue requirements. The weakness of the Utility Cost Test is that it does not include all the issues associated with the program/portfolio as a resource. Therefore, it must be accompanied by the other test to evaluate whether to implement or continue a program.

Societal Test

The Societal Test is an attempt to measure the net cost/benefit to society of a program or portfolio of programs. Simply put, this is the Total Resource Cost Test with the cost and benefits to society added. The benefits to society are called “externalities.” The externalities include benefits such as environmental and improved health care. They also include participant benefits such as improved comfort and health.

Similar to the other tests, the results of the Societal Test are expressed as a net present value, life cycle impact, or benefit-cost ratio. Many times the results will be expressed in terms of life cycle impact or net present value per unit of energy saved.

This test is usually used in the political or regulatory environment to evaluate the impact of programs and whether these programs are beneficial to society as a whole.

The strength of the Societal Test is its ability to view costs and benefits from a much broader perspective and to include issues that society wants addressed. Thus, it provides a framework with which to determine whether a program is desirable and should be implemented or continued.

The weakness of the Societal Test is in monetizing the externalities. Many of these are difficult if not impossible to represent accurately. Any arbitrary or misapplied monetization can significantly impact the test results providing an incorrect picture of the true environment in which the program will be delivered.

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