Since you are reading this, you are probably on board with the theory that ratepayer funded efficiency programs help keep energy costs lower than with the status quo: building generation transmission, and distribution for whatever quantity and whenever millions of customers in aggregate want to use the resource. The “what and when” generates a load curve. We will discuss load shape management in future posts. For now, I will share some insights from a true thought leader in the industry.
Costs and Benefits of Efficiency
Tom Eckman worked for years with the Northwest Power and Conservation Council as a resource planner. He has some revolutionary ideas about efficiency and demand management parity with supply-side resources. Here is a link to the paper he sent me a couple years ago.
We start with the most recent gold standard of resource cost comparisons, including efficiency, as published by Lazard in the chart below.
Tom writes that efficiency parity with supply-side resources includes:
- An assessment of energy savings
- Cost of acquiring the savings
- Comparison of costs and risks to supply-side resources
This is all quite straightforward, but he has some zingers to follow. The zingers include cutting the chains of thought that keep efficiency in a tiny little box, and thinking more broadly.
Tom writes that utilities often have purchase power agreements with generators that are far outside its service territory. Most electricity markets have a short-term (day ahead) and long-term (year or more ahead) auction for energy and demand resources. If my customers can get power from a cheap generator in another state or region, why should I not be able to acquire demand-side resources in that state or region so I can get more access to the cheap power as well? He mentions one such agreement dates back almost 30 years – outside the box.
Full Cost of the Resource
One reason efficiency is so cheap to acquire is that the individual bears most of the incremental cost. This is not the case for supply-side resources.
Tom explains that supply-side resources include a cost curve to acquire the resource. The Lazard chart above shows ranges based on many things like cost of land and transmission for wind, fuel costs, and so forth. When determining the cost of a supply-side resource, like a combined-cycle natural gas plant, everyone agrees the entire cost for land, construction, labor, and fuel is included in the cost. But for efficiency, only a fraction of the resource cost is covered.
He asks the question, how much combined cycle or wind resources are “realistically achievable” if we offer 50% of the construction cost? (like we do for efficiency)
Then he moves on to this doozer: legislation often calls for efficiency plans to capture all cost-effective measures while artificially capping the investment in the cheapest resource.
Program v Resource Cost
Eckman argues that the Total Resource Cost Test (TRC) is a measure of program cost-effectiveness rather than resource cost-effectiveness (as the name would imply). One reason the T in TRC does not represent total is that benefits from free riders shall not be counted. Why?
On the supply side, I’m a free rider. The utility’s cost to connect my home to the grid and put a meter on the wall is $50 per month; and that $50 does not include any electricity. My total electric bill isn’t even $600 per year because of the tariff structure and because I don’t use much electricity. I’m a free rider!
Tom’s theory is in line with mine from a couple years ago in Cost of Energy Saved – Drop it and Give Me Twenty. Compare ratepayer investments to ratepayer benefits. The rest is the participant’s decision.
When Efficiency is no Longer Cost Effective
Efficiency and demand management is no longer cost effective when its cost becomes greater than supply-side resources. For this, we should be comparing program costs (incentives and administration) versus conventional supply (new poles, wires, power plants, and transformers). Period.