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Participants & Ratepayers: Who Benefits?

By April 3, 2012December 26th, 2021Briefs

I’m back. Today we’ll discuss the DSM Participant Cost Test and the Ratepayer Impact Test. These are critical tests in DSM planning and program design.

Participant Cost Test

This test determines if the participant will benefit economically from adopting an energy efficiency measure or participating in a program. The result of the test is usually expressed as a net present value or ratio of the lifetime savings and costs.

The benefits include reduced energy bills and in some jurisdictions, non-energy expenses, utility incentives, and tax incentives. Remember that the utility bill savings are the energy and demand impacts (gross savings) on the customers’ bill. The costs include any equipment purchase costs and any expenses that result from implementing the measure.

I use this test as my first critical analysis of whether to pursue a measure or program. Participant economics drive most buying decisions. This analysis determines the type and amount of the incentive necessary to provide the participant with an economically attractive value proposition. Or, conversely, it demonstrates that the measure/program will not be successful or the customer must be approached using non-economic drivers such as environmental stewardship in order to motivate participation. If this test is applied to a customer population, it can be used to determine program participation goals. More on this a different day.

One of the strengths of the Participant Test is its applicability to address many types of programs, such as fuel switching and renewable energy. The major weakness is its inability to include customer behavior and non-economic factors in the customer’s decision making process. Thus, other analyses must be performed to evaluate these inputs.

Ratepayer Impact Measure Test (RIM Test)

The RIM Test determines whether a program will have a positive or negative impact on utility rates. In other words, will the program tend to increase or decrease rates.

The benefits used in the RIM Test are savings from the utility’s avoided costs that impact revenue requirements. These include reductions in transmission, distribution, generation, and capacity. Capacity is referring to investment in plant. The RIM Test analysis covers the period over which the energy savings will be realized. The costs used in the RIM Test include program costs, incentives, and any revenue impacts.

The results are usually expressed as a net present value, life cycle revenue 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 particularly useful as it provides insight into the rate impact of a program or portfolio of programs. Any negative result means a rate increase which is borne by ratepayers. The RIM Test measures the impact on non-participants and quantifies any potentially cross subsidies.

The RIM Test is beneficial when comparing program options during DSM planning or to provide management and regulators with the impact of our efforts. It also helps to shape a program portfolio by indicating which programs involve rate issues and which are rate neutral or beneficial.

The weakness of the RIM Test is its uncertainty. The test relies heavily on long-term projections of marginal costs and rates which are very difficult to predict with any accuracy. The RIM Test isn’t normally used for fuel switching programs due to the difficulty in gathering accurate projections for energy costs.

Michaels Energy

Author Michaels Energy

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