CALIFORNIA STANDARD PRACTICE MANUAL ECONOMIC ANALYSIS OF DEMAND-SIDE PROGRAMS AND PROJECTS

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1 CALIFORIA STADARD PRACTICE MAUAL ECOOMIC AALYSIS OF DEMAD-SIDE PROGRAMS AD PROJECTS OCTOBER 200

2 Table of Conens Page Chaper... Basic Mehodology... Background... Demand-Side Managemen Caegories and Program Definiions...2 Basic Mehods...4 Balancing he Tess...6 Limiaions: Exernaliy Values and Policy Rules...6 Exernaliy Values...7 Policy Rules...7 Chaper Paricipan Tes...8 Definiion...8 Benefis and Coss...8 How he Resuls Can be Expressed...9 Srenghs of he Paricipan Tes...9 Weaknesses of he Paricipan Tes... 0 Formulae... 0 Chaper The Raepayer Impac Measure Tes... 3 Definiion... 3 Benefis and Coss... 3 How he Resuls can be Expressed... 3 Srenghs of he Raepayer Impac Measure (RIM) Tes... 4 Weaknesses of he Raepayer Impac Measure (RIM) Tes... 5 Chaper Toal Resource Cos Tes... 8 Definiion... 8 How he Resuls Can be Expressed... 9 Srenghs of he Toal Resource Cos Tes... 2 Weakness of he Toal Resource Cos Tes... 2 Formulas... 2 Chaper Program Adminisraor Cos Tes Definiion Benefis and Coss How he Resuls Can be Expressed Srenghs of he Program Adminisraor Cos Tes Weaknesses of he Program Adminisraor Cos Tes Formulas Appendix A Inpus o Equaions and Documenaion Appendix B... 28

3 Summary of Equaions and Glossary of Symbols Basic Equaions Paricipan Tes Raepayer Impac Measure Tes Toal Resource Cos Tes Program Adminisraor Cos Tes Benefis and Coss Paricipan Tes Raepayer Impac Measure Tes Toal Resource Cos Tes Program Adminisraor Cos Tes Glossary of Symbols Appendix C Derivaion of Rim Lifecycle Revenue Impac Formula Rae Impac Measure

4 Chaper Basic Mehodology Background Since he 970s, conservaion and load managemen programs have been promoed by he California Public Uiliies Commission (CPUC) and he California Energy Commission (CEC) as alernaives o power plan consrucion and gas supply opions. Conservaion and load managemen (C&LM) programs have been implemened in California by he major uiliies hrough he use of raepayer money and by he CEC pursuan o he CEC legislaive mandae o esablish energy efficiency sandards for new buildings and appliances. While cos-effeciveness procedures for he CEC sandards are oulined in he Public Resources Code, no such official guidelines exised for uiliy-sponsored programs. Wih he publicaion of he Sandard Pracice for Cos-Benefi Analysis of Conservaion and Load Managemen Programs in February 983, his void was subsanially filled. Wih he informal "adopion" one year laer of an appendix ha idenified cos-effeciveness procedures for an "All Raepayers" es, C&LM program cos effeciveness consised of he applicaion of a series of ess represening a variey of perspecives-paricipans, nonparicipans, all raepayers, sociey, and he uiliy. The Sandard Pracice Manual was revised again in The primary changes (relaive o he 983 version), were: () he renaming of he on-paricipan Tes o he Raepayer Impac Tes ; (2) renaming he All-Raepayer Tes o he Toal Resource Cos Tes. ; (3) reaing he Socieal Tes as a varian of he Toal Resource Cos Tes; and, (4) an expanded explanaion of demand-side aciviies ha should be subjeced o sandard procedures of benefi-cos analysis. Furher changes o he manual capured in his (200) version were promped by he cumulaive effecs of changes in he elecric and naural gas indusries and a variey of changes in California saue relaed o hese changes. As par of he major elecric indusry resrucuring legislaion of 996 (AB890), for example, a public goods charge was esablished ha ensured minimum funding levels for cos effecive conservaion and energy efficiency for he period, and hen (in 2000) exended hrough he year 20. Addiional legislaion in 2000 (AB002) esablished a naural gas surcharge for similar purposes. Laer in ha year, he Energy Securiy and Reliabiliy Ac of 2000 (AB970) direced he California Public Uiliies Commission o esablish, by he Spring of 200, a disribuion charge o provide revenues for a self generaion program and a direcive o consider changes o cos-effeciveness mehods o beer accoun for reliabiliy concerns. In he Spring of 200, a new sae agency he Consumer Power and Conservaion Financing Auhoriy was creaed. This agency is expeced o provide addiional revenues in he form of sae revenue bonds ha could supplemen he amoun and ype of public financial resources o finance energy efficiency and self generaion aciviies.

5 The modificaions o he Sandard Pracice Manual reflec hese more recen developmens in several ways. Firs, he Uiliy Cos Tes is renamed he Program Adminisraor Tes o include he assessmen of programs managed by oher agencies. Second, a definiion of self generaion as a ype of demand-side aciviy is included. Third, he descripion of he various poenial elemens of exernaliies in he Socieal version of he TRC es is expanded. Finally he limiaions secion oulines he scope of his manual and elaboraes upon he processes radiionally insiued by implemening agencies o adop values for hese exernaliies and o adop he he policy rules ha accompany his manual. Demand-Side Managemen Caegories and Program Definiions One imporan aspec of esablishing sandardized procedures for cos-effeciveness evaluaions is he developmen and use of consisen definiions of caegories, programs, and program elemens. This manual employs he use of general program caegories ha disinguish beween differen ypes of demand-side managemen programs, conservaion, load managemen, fuel subsiuion, load building and self-generaion. Conservaion programs reduce elecriciy and/or naural gas consumpion during all or significan porions of he year. Conservaion in his conex includes all energy efficiency improvemens. An energy efficiency improvemen can be defined as reduced energy use for a comparable level of service, resuling from he insallaion of an energy efficiency measure or he adopion of an energy efficiency pracice. Level of service may be expressed in such ways as he volume of a refrigeraor, emperaure levels, producion oupu of a manufacuring faciliy, or lighing level per square foo. Load managemen programs may eiher reduce elecriciy peak demand or shif demand from on peak o non-peak periods. Fuel subsiuion and load building programs share he common feaure of increasing annual consumpion of eiher elecriciy or naural gas relaive o wha would have happened in he absence of he program. This effec is accomplished in significanly differen ways, by inducing he choice of one fuel over anoher (fuel subsiuion), or by increasing sales of elecriciy, gas, or elecriciy and gas (load building). Self generaion refers o disribued generaion (DG) insalled on he cusomer s side of he elecric uiliy meer, which serves some or all of he cusomer's elecric load, ha oherwise would have been provided by he cenral elecric grid. In some cases, self generaion producs are applied in a combined hea and power manner, in which case he hea produced by he self generaion produc is used on sie o provide some or all of he cusomer s hermal needs. Self generaion echnologies include, bu are no limied o, phoovolaics, wind urbines, fuel cells, microurbines, small gas-fired urbines, and gas-fired inernal combusion engines. Fuel subsiuion and load building programs were relaively new o demand-side managemen in California in he lae 980s, born ou of he convergence of several facors 2

6 ha ranslaed ino average raes ha subsanially exceeded marginal coss. Proposals by uiliies o implemen programs ha increase sales had promped he need for addiional procedures for esimaing program cos effeciveness. These procedures maybe applicable in a new conex. AB 970 amended he Public Uiliies Code and provided he moivaion o develop a cos-effeciveness mehod ha can be used on a common basis o evaluae all programs ha will remove elecric load from he cenralized grid, including energy efficiency, load conrol/demand-responsiveness programs and self-generaion. Hence, selfgeneraion was also added o he lis of demand side managemen programs for coseffeciveness evaluaion. In some cases, self-generaion programs insalled wih incremenal load are also included since he definiion of self-generaion is no necessarily confined o projecs ha reduce elecric load on he grid. For example, suppose an indusrial cusomer insalls a new faciliy wih a peak consumpion of.5 MW, wih an inegraed on-sie.0 MW gas fired DG uni. The combined impac of he new faciliy is load building since he new faciliy can draw up o 0.5 MW from he grid, even when he DG uni is running. The proper characerizaion of each ype of demand-side managemen program is essenial o ensure he proper reamen of inpus and he appropriae inerpreaion of cos-effeciveness resuls. Caegorizing programs is imporan because in many cases he same specific device can be and should be evaluaed in more han one caegory. For example, he promoion of an elecric hea pump can and should be reaed as par of a conservaion program if he device is insalled in lieu of a less efficien elecric resisance heaer. If he incenive induces he insallaion of an elecric hea pump insead of gas space heaing, however, he program needs o be considered and evaluaed as a fuel subsiuion program. Similarly, naural gasfired self-generaion, as well as self-generaion unis using oher non-renewable fossil fuels, mus be reaed as fuel-subsiuion. In common wih oher ypes of fuel-subsiuion, any coss of gas ransmission and disribuion, and environmenal exernaliies, mus be accouned for. In addiion, cos-effeciveness analyses of self-generaion should accoun for uiliy inerconnecion coss. Similarly, a hermal energy sorage device should be reaed as a load managemen program when he predominan effec is o shif load. If he accepance of a uiliy incenive by he cusomer o, insall he energy sorage device is a decisive aspec of he cusomer's decision o remain an elecric uiliy cusomer (i.e., o rejec or defer he opion of insalling a gas-fired cogeneraion sysem), hen he predominan effec of he hermal energy sorage device has been o subsiue elecriciy service for he naural gas service ha would have occurred in he absence of he program. In addiion o Fuel Subsiuion and Load Building Programs, recen uiliy program proposals have included reference o "load reenion," "sales reenion," "marke reenion," or "cusomer reenion" programs. In mos cases, he effec of such programs is idenical o eiher a Fuel Subsiuion or a Load Building program sales of one fuel are increased relaive o sales wihou he program. A case may be made, however, for defining a separae caegory of program called "load reenion." One unambiguous example of a load reenion program is he siuaion where a program keeps a cusomer from relocaing o anoher uiliy service area. However, compuaionally he equaions and guidelines included in his manual o accommodae Fuel Subsiuion and Load Building programs can also handle his special siuaion as well. 3

7 Basic Mehods This manual idenifies he cos and benefi componens and cos-effeciveness calculaion procedures from four major perspecives: Paricipan, Raepayer Impac Measure (RIM), Program Adminisraor Cos (PAC), and Toal Resource Cos (TRC). A fifh perspecive, he Socieal, is reaed as a variaion on he Toal Resource Cos es. The resuls of each perspecive can be expressed in a variey of ways, bu in all cases i is necessary o calculae he ne presen value of program impacs over he lifecycle of hose impacs. Table I summarizes he cos-effeciveness ess addressed in his manual. For each of he perspecives, he able shows he appropriae means of expressing es resuls. The primary uni of measuremen refers o he way of expressing es resuls ha are considered by he saffs of he wo Commissions as he mos useful for summarizing and comparing demandside managemen (DSM) program cos-effeciveness. Secondary indicaors of coseffeciveness represen supplemenal means of expressing es resuls ha are likely o be of paricular value for cerain ypes of proceedings, repors, or programs. This manual does no specify how he cos-effeciveness es resuls are o be displayed or he level a which cos-effeciveness is o be calculaed (e.g., groups of programs, individual programs, and program elemens for all or some programs). I is reasonable o expec differen levels and ypes of resuls for differen regulaory proceedings or for differen phases of he process used o esablish proposed program-funding levels. For example, for summary ables in general rae case proceedings a he CPUC, he mos appropriae ess may be he RIM lifecycle revenue impac, Toal Resource Cos, and Program Adminisraor Cos es resuls for programs or groups of programs. The analysis and review of program proposals for he same proceeding may include Paricipan es resuls and various addiional indicaors of cos-effeciveness from all ess for each individual program elemen. In he case of cos-effeciveness evaluaions conduced in he conex of inegraed long-erm resource planning aciviies, such deailed examinaion of muliple indicaions of coss and benefis may be impracical. 4

8 Primary e presen value (all paricipans) Lifecycle revenue impac per Uni of energy (kwh or herm) or demand cusomer (kw) e presen value e presen value (PV) e presen value Table I Cos-Effeciveness Tess Paricipan Raepayer Impac Measure Toal Resource Cos Program Adminisraor Cos Secondary Discouned payback (years) Benefi-cos raio e presen value (average paricipan) Lifecycle revenue impac per uni Annual revenue impac (by year, per kwh, kw, herm, or cusomer) Firs-year revenue impac (per kwh, kw, herm, or cusomer) Benefi-cos raio Benefi-cos raio (BCR) Levelized cos (cens or dollars per uni of energy or demand) Socieal (PV, BCR) Benefi-cos raio Levelized cos (cens or dollars per uni of energy or demand) Raher han idenify he precise requiremens for reporing cos-effeciveness resuls for all ypes of proceedings or repors, he approach aken in his manual is o (a) specify he componens of benefis and coss for each of he major ess, (b) idenify he equaions o be used o express he resuls in accepable ways; and (c) indicae he relaive value of he differen unis of measuremen by designaing primary and secondary es resuls for each es. I should be noed ha for some ypes of demand-side managemen programs, meaningful cos-effeciveness analyses canno be performed using he ess in his manual. The following guidelines are offered o clarify he appropriaed "mach" of differen ypes of programs and ess:. For generalized informaion programs (e.g., when cusomers are provided generic informaion on means of reducing uiliy bills wihou he benefi of on-sie evaluaions or cusomer billing daa), cos-effeciveness ess are no expeced because of he exreme difficuly in esablishing meaningful esimaes of load impacs. 5

9 2. For any program where more han one fuel is affeced, he preferred uni of measuremen for he RIM es is he lifecycle revenue impacs per cusomer, wih gas and elecric componens repored separaely for each fuel ype and for combined fuels. 3. For load building programs, only he RIM ess are expeced o be applied. The Toal Resource Cos and Program Adminisraor Cos ess are inended o idenify coseffeciveness relaive o oher resource opions. I is inappropriae o consider increased load as an alernaive o oher supply opions. 4. Levelized coss may be appropriae as a supplemenary indicaor of cos per uni for elecric conservaion and load managemen programs relaive o generaion opions and gas conservaion programs relaive o gas supply opions, bu he levelized cos es is no applicable o fuel subsiuion programs (since hey combine gas and elecric effecs) or load building programs (which increase sales). The delineaion of he various means of expressing es resuls in Table is no mean o discourage he coninued developmen of addiional variaions for expressing coseffeciveness. Of paricular ineres is he developmen of indicaors of program cos effeciveness ha can be used o assess he appropriaeness of program scope (i.e. level of funding) for General Rae Case proceedings. Addiional ess, if consruced from he ne presen worh in conformance wih he equaions designaed in his manual, could prove useful as a means of developing mehodologies ha will address issues such as he opimal iming and scope of demand-side managemen programs in he conex of overall resource planning. Balancing he Tess The ess se forh in his manual are no inended o be used individually or in isolaion. The resuls of ess ha measure efficiency, such as he Toal Resource Cos Tes, he Socieal Tes, and he Program Adminisraor Cos Tes, mus be compared no only o each oher bu also o he Raepayer Impac Measure Tes. This muli-perspecive approach will require program adminisraors and sae agencies o consider radeoffs beween he various ess. Issues relaed o he precise weighing of each es relaive o oher ess and o developing formulas for he definiive balancing of perspecives are ouside he scope of his manual. The manual, however, does provide a brief descripion of he srenghs and weaknesses of each es (Chapers 2, 3, 4, and 5) o assis users in qualiaively weighing es resuls. Limiaions: Exernaliy Values and Policy Rules The lis of exernaliies idenified in Chaper 4, page 27, in he discussion on he Socieal version of he Toal Resource Cos es is broad, illusraive and by no means exhausive. Tradiionally, implemening agencies have independenly deermined he deails such as he componens of he exernaliies, he exernaliy values and he policy rules which specify he conexs in which he exernaliies and he ess are used. 6

10 Exernaliy Values The values for he exernaliies have no been provided in he manual. There are separae sudies and mehodologies o arrive a hese values. There are also separae processes insiued by implemening agencies before such values can be adoped formally. Policy Rules The appropriae choice of inpus and inpu componens vary by program area and projec. For insance, low income programs are evaluaed using a broader se of non-energy benefis ha have no been provided in deail in his manual. Implemening agencies radiionally have had he discreion o use or o no use hese inpus and/or benefis on a projec- or program-specific basis. The policy rules ha specify he conexs in which i is appropriae o use he exernaliies, heir componens, and ess menioned in his manual are an inegral par of any cos-effeciveness evaluaion. These policy rules are no a par of his manual. To summarize, he manual provides he mehodology and he cos-benefi calculaions only. The implemening agencies (such as he California Public Uiliies Commission and he California Energy Commission) have radiionally uilized open public processes o incorporae he diverse views of sakeholders before adoping exernaliy values and policy rules which are an inegral par of he cos-effeciveness evaluaion. 7

11 Chaper 2 Paricipan Tes Definiion The Paricipans Tes is he measure of he quanifiable benefis and coss o he cusomer due o paricipaion in a program. Since many cusomers do no base heir decision o paricipae in a program enirely on quanifiable variables, his es canno be a complee measure of he benefis and coss of a program o a cusomer. Benefis and Coss The benefis of paricipaion in a demand-side program include he reducion in he cusomer's uiliy bill(s), any incenive paid by he uiliy or oher hird paries, and any federal, sae, or local ax credi received. The reducions o he uiliy bill(s) should be calculaed using he acual reail raes ha would have been charged for he energy service provided (elecric demand or energy or gas). Savings esimaes should be based on gross savings, as opposed o ne energy savings. In he case of fuel subsiuion programs, benefis o he paricipan also include he avoided capial and operaing coss of he equipmen/appliance no chosen. For load building programs, paricipan benefis include an increase in produciviy and/or service, which is presumably equal o or greaer han he produciviy/ service wihou paricipaing. The inclusion of hese benefis is no required for his es, bu if hey are included hen he socieal es should also be performed. The coss o a cusomer of program paricipaion are all ou-of-pocke expenses incurred as a resul of paricipaing in a program, plus any increases in he cusomer's uiliy bill(s). The ou-of-pocke expenses include he cos of any equipmen or maerials purchased, including sales ax and insallaion; any ongoing operaion and mainenance coss; any removal coss (less salvage value); and he value of he cusomer's ime in arranging for he insallaion of he measure, if significan. Gross energy savings are considered o be he savings in energy and demand seen by he paricipan a he meer. These are he appropriae program impacs o calculae bill reducions for he Paricipan Tes. e savings are assumed o be he savings ha are aribuable o he program. Tha is, ne savings are gross savings minus hose changes in energy use and demand ha would have happened even in he absence of he program. For fuel subsiuion and load building programs, gross-o-ne consideraions accoun for he impacs ha would have occurred in he absence of he program. 8

12 How he Resuls can be Expressed The resuls of his es can be expressed in four ways: hrough a ne presen value per average paricipan, a ne presen value for he oal program, a benefi-cos raio or discouned payback. The primary means of expressing es resuls is ne presen value for he oal program; discouned payback, benefi-cos raio, and per paricipan ne presen value are secondary ess. The discouned payback is he number of years i akes unil he cumulaive discouned benefis equal or exceed he cumulaive discouned coss. The shorer he discouned payback, he more aracive or beneficial he program is o he paricipans. Alhough "payback period" is ofen defined as undiscouned in he exbooks, a discouned payback period is used here o approximae more closely he consumer's percepion of fuure benefis and coss. 2 e presen value (PVp) gives he ne dollar benefi of he program o an average paricipan or o all paricipans discouned over some specified ime period. A ne presen value above zero indicaes ha he program is beneficial o he paricipans under his es. The benefi-cos raio (BCRp) is he raio of he oal benefis of a program o he oal coss discouned over some specified ime period. The benefi-cos raio gives a measure of a rough rae of reurn for he program o he paricipans and is also an indicaion of risk. A benefi-cos raio above one indicaes a beneficial program. Srenghs of he Paricipan Tes The Paricipans Tes gives a good "firs cu" of he benefi or desirabiliy of he program o cusomers. This informaion is especially useful for volunary programs as an indicaion of poenial paricipaion raes. For programs ha involve a uiliy incenive, he Paricipan Tes can be used for program design consideraions such as he minimum incenive level, wheher incenives are really needed o induce paricipaion, and wheher changes in incenive levels will induce he desired amoun of paricipaion. These es resuls can be useful for program peneraion analyses and developing program paricipaion goals, which will minimize adverse raepayer impacs and maximize benefis. For fuel subsiuion programs, he Paricipan Tes can be used o deermine wheher program paricipaion (i.e. choosing one fuel over anoher) will be in he long-run bes ineres of he cusomer. The primary means of esablishing such assurances is he ne presen value, which looks a he coss and benefis of he fuel choice over he life of he equipmen. 2 I should be noed ha if a demand-side program is beneficial o is paricipans (PVp > 0 and BCRp >.0) using a paricular discoun rae, he program has an inernal rae of reurn (IRR) of a leas he value of he discoun rae. 9

13 Weaknesses of he Paricipan Tes one of he Paricipan Tes resuls (discouned payback, ne presen value, or benefi-cos raio) accuraely capure he complexiies and diversiy of cusomer decision-making processes for demand-side managemen invesmens. Unil or unless more is known abou cusomer aiudes and behavior, inerpreaions of Paricipan Tes resuls coninue o require considerable judgmen. Paricipan Tes resuls play only a supporive role in any assessmen of conservaion and load managemen programs as alernaives o supply projecs. Formulae The following are he formulas for discouned payback, he ne presen value (PVp) and he benefi-cos raio (BCRp) for he Paricipan Tes. PV P Bp - Cp PVavp (Bp - Cp) / P BCRp Bp / Cp DPp Min j such ha Bj > Cj Where: PVp e presen value o all paricipans PVavp e presen value o he average paricipan BCRp Benefi-cos raio o paricipans DPp Discouned payback in years Bp PV of benefi o paricipans Cp PV of coss o paricipans Bj Cumulaive benefis o paricipans in year j Cj Cumulaive coss o paricipans in year j P umber of program paricipans J Firs year in which cumulaive benefis are cumulaive coss. d Ineres rae (discoun) The Benefi (Bp) and Cos (Cp) erms are furher defined as follows: BP BR TC ( d) IC " ABa PA " ( d) a PC BI C ( d) Where: " BR Bill reducions in year Bi Bill increases in year 0

14 TC Tax credis in year IC Incenives paid o he paricipan by he sponsoring uiliy in year 3 PC Paricipan coss in year o include: Iniial capial coss, including sales ax 4 Ongoing operaion and mainenance coss include fuel cos Removal coss, less salvage value Value of he cusomer's ime in arranging for insallaion, if significan PACa Paricipan avoided coss in year for alernae fuel devices (coss of devices no chosen) Aba Avoided bill from alernae fuel in year The firs summaion in he Bp equaion should be used for conservaion and load managemen programs. For fuel subsiuion programs, boh he firs and second summaions should be used for Bp. oe ha in mos cases, he cusomer bill impac erms (BR, BI, and AB a ) are furher deermined by cosing period o reflec load impacs and/or rae schedules, which vary subsanially by ime of day and season. The formulas for hese variables are as follows: BR I (# EGi " AC : Ei " K i ) i i I (# DG i " AC : D i " K i ) OBR AB a (Use BR formula, bu wih raes and cosing periods appropriae for he alernae fuel uiliy) BI I ( $ EGi # AC : Ei # ( K i " )) i i I ( $ DG i # AC : D i # ( K i " )) OBI Where: ΔEG i Reducion in gross energy use in cosing period i in year ΔDG i Reducion in gross billing demand in cosing period i in year AC:E i Rae charged for energy in cosing period i in year 3 Some difference of opinion exiss as o wha should be called an incenive. The erm can be inerpreed broadly o include almos anyhing. Direc rebaes, ineres paymen subsidies, and even energy audis can be called incenives. Operaionally, i is necessary o resric he erm o include only dollar benefis such as rebaes or rae incenives (monhly bill credis). Informaion and services such as audis are no considered incenives for he purposes of hese ess. If he incenive is o offse a specific paricipan cos, as in a rebae-ype incenive, he full cusomer cos (before he rebae mus be included in he PC erm 4 If money is borrowed by he cusomer o cover his cos, i may no be necessary o calculae he annual morgage and discoun his amoun if he presen worh of he morgage paymens equals he iniial cos. This occurs when he discoun rae used is equal o he ineres rae of he morgage. If he wo raes differ (e.g., a loan offered by he uiliy), hen he sream of morgage paymens should be discouned by he discoun rae chosen.

15 AC:D i Rae charged for demand in cosing period i in year K i when ΔEGi or ΔDGi is posiive (a reducion) in cosing period i in year, and zero oherwise OBR Oher bill reducions or avoided bill paymens (e.g.,, cusomer charges, sandby raes). OBI Oher bill increases (i.e. cusomer charges, sandby raes). I umber of periods of paricipan s paricipaion In load managemen programs such as TOU raes and air-condiioning cycling, here are ofen no direc cusomer hardware coss. However, aemps should be made o quanify indirec coss cusomers may incur ha enable hem o ake advanage of TOU raes and similar programs. If no cusomer hardware coss are expeced or esimaes of indirec coss and value of service are unavailable, i may no be possible o calculae he benefi-cos raio and discouned payback period. 2

16 Chaper 3 The Raepayer Impac Measure Tes 5 Definiion The Raepayer Impac Measure (RIM) es measures wha happens o cusomer bills or raes due o changes in uiliy revenues and operaing coss caused by he program. Raes will go down if he change in revenues from he program is greaer han he change in uiliy coss. Conversely, raes or bills will go up if revenues colleced afer program implemenaion are less han he oal coss incurred by he uiliy in implemening he program. This es indicaes he direcion and magniude of he expeced change in cusomer bills or rae levels. Benefis and Coss The benefis calculaed in he RIM es are he savings from avoided supply coss. These avoided coss include he reducion in ransmission, disribuion, generaion, and capaciy coss for periods when load has been reduced and he increase in revenues for any periods in which load has been increased. The avoided supply coss are a reducion in oal coss or revenue requiremens and are included for boh fuels for a fuel subsiuion program. The increase in revenues are also included for boh fuels for fuel subsiuion programs. Boh he reducions in supply coss and he revenue increases should be calculaed using ne energy savings. The coss for his es are he program coss incurred by he uiliy, and/or oher eniies incurring coss and creaing or adminisering he program, he incenives paid o he paricipan, decreased revenues for any periods in which load has been decreased and increased supply coss for any periods when load has been increased. The uiliy program coss include iniial and annual coss, such as he cos of equipmen, operaion and mainenance, insallaion, program adminisraion, and cusomer dropou and removal of equipmen (less salvage value). The decreases in revenues and he increases in he supply coss should be calculaed for boh fuels for fuel subsiuion programs using ne savings. How he Resuls can be Expressed The resuls of his es can be presened in several forms: he lifecycle revenue impac (cens or dollars) per kwh, kw, herm, or cusomer; annual or firs-year revenue impacs (cens or dollars per kwh, kw, herms, or cusomer); benefi-cos raio; and ne presen value. The primary unis of measuremen are he lifecycle revenue impac, expressed as he change in raes (cens per kwh for elecric energy, dollars per kw for elecric capaciy, cens per herm for naural gas) and he ne presen value. Secondary es resuls are he lifecycle revenue 5 The Raepayer Impac Measure Tes has previously been described under wha was called he "on-paricipan Tes." The on-paricipan Tes has also been called he "Impac on Rae Levels Tes." 3

17 impac per cusomer, firs-year and annual revenue impacs, and he benefi-cos raio. LRI RIM values for programs affecing elecriciy and gas should be calculaed for each fuel individually (cens per kwh or dollars per kw and cens per herm) and on a combined gas and elecric basis (cens per cusomer). The lifecycle revenue impac (LRI) is he one-ime change in raes or he bill change over he life of he program needed o bring oal revenues in line wih revenue requiremens over he life of he program. The rae increase or decrease is expeced o be pu ino effec in he firs year of he program. Any successive rae changes such as for cos escalaion are made from here. The firs-year revenue impac (FRI) is he change in raes in he firs year of he program or he bill change needed o ge oal revenues o mach revenue requiremens only for ha year. The annual revenue impac (ARI) is he series of differences beween revenues and revenue requiremens in each year of he program. This series shows he cumulaive rae change or bill change in a year needed o mach revenues o revenue requiremens. Thus, he ARIRIM for year six per kwh is he esimae of he difference beween presen raes and he rae ha would be in effec in year six due o he program. For resuls expressed as lifecycle, annual, or firs-year revenue impacs, negaive resuls indicae favorable effecs on he bills of raepayers or reducions in raes. Posiive es resul values indicae adverse bill impacs or rae increases. e presen value (PV RIM ) gives he discouned dollar ne benefi of he program from he perspecive of rae levels or bills over some specified ime period. A ne presen value above zero indicaes ha he program will benefi (lower) raes and bills. The benefi-cos raio (BCR RIM) is he raio of he oal benefis of a program o he oal coss discouned over some specified ime period. A benefi-cos raio above one indicaes ha he program will lower raes and bills. Srenghs of he Raepayer Impac Measure (RIM) Tes In conras o mos supply opions, demand-side managemen programs cause a direc shif in revenues. Under many condiions, revenues los from DSM programs have o be made up by raepayers. The RIM es is he only es ha reflecs his revenue shif along wih he oher coss and benefis associaed wih he program. An addiional srengh of he RIM es is ha he es can be used for all demand-side managemen programs (conservaion, load managemen, fuel subsiuion, and load building). This makes he RIM es paricularly useful for comparing impacs among demand-side managemen opions. Some of he unis of measuremen for he RIM es are of greaer value han ohers, depending upon he purpose or ype of evaluaion. The lifecycle revenue impac per cusomer is he mos useful uni of measuremen when comparing he meris of programs wih highly variable scopes (e.g.,, funding levels) and when analyzing a wide range of programs ha 4

18 include boh elecric and naural gas impacs. Benefi-cos raios can also be very useful for program design evaluaions o idenify he mos aracive programs or program elemens. If comparisons are being made beween a program or group of conservaion/load managemen programs and a specific resource projec, lifecycle cos per uni of energy and annual and firs-year ne coss per uni of energy are he mos useful way o express es resuls. Of course, his requires developing lifecycle, annual, and firs-year revenue impac esimaes for he supply-side projec. Weaknesses of he Raepayer Impac Measure (RIM) Tes Resuls of he RIM es are probably less cerain han hose of oher ess because he es is sensiive o he differences beween long-erm projecions of marginal coss and long-erm projecions of raes, wo cos sreams ha are difficul o quanify wih cerainy. RIM es resuls are also sensiive o assumpions regarding he financing of program coss. Sensiiviy analyses and ineracive analyses ha capure feedback effecs beween sysem changes, rae design opions, and alernaive means of financing generaion and nongeneraion opions can help overcome hese limiaions. However, hese ypes of analyses may be difficul o implemen. An addiional cauion mus be exercised in using he RIM es o evaluae a fuel subsiuion program wih muliple end use efficiency opions. For example, under condiions where marginal coss are less han average coss, a program ha promoes an inefficien appliance may give a more favorable es resul han a program ha promoes an efficien appliance. Though he resuls of he RIM es accuraely reflec rae impacs, he implicaions for longerm conservaion effors need o be considered. Formulae: The formulae for he lifecycle revenue impac (LRI RIM)' ne presen value (PV RIM), benefi-cos raio (BCR RIM)' he firs-year revenue impacs and annual revenue impacs are presened below: LRIRIM (CRIM - BRIM) / E FRIRIM (CRIM - BRIM) / E for I ARIRIM FRIRIM for I (CRIM - BRIM )/E for 2,.., PVRIM BRIM-CRIM BCRRIM` BRIM/CRIM where: LRIRIM Lifecycle revenue impac of he program per uni of energy (kwh or herm) or demand (kw) (he one-ime change in raes) or per cusomer (he change in cusomer bills over he life of he program). (oe: An appropriae choice of kwh, herm, kw, and cusomer should be made) 5

19 FRIRIM Firs-year revenue impac of he program per uni of energy, demand, or per cusomer. ARIRIM Sream of cumulaive annual revenue impacs of he program per uni of energy, demand, or per cusomer. (oe: The erms in he ARI formula are no discouned; hus hey are he nominal cumulaive revenue impacs. Discouned cumulaive revenue impacs may be calculaed and submied if hey are indicaed as such. oe also ha he sum of he discouned sream of cumulaive revenue impacs does no equal he LRI RIM') PVRIM e presen value levels BCRRIM Benefi-cos raio for rae levels BRIM CRIM E Benefis o rae levels or cusomer bills Coss o rae levels or cusomer bills Discouned sream of sysem energy sales (kwh or herms) or demand sales (kw) or firs-year cusomers. (See Appendix D for a descripion of he derivaion and use of his erm in he LRIRIM es.) The B RIM and C RIM erms are furher defined as follows: B RIM UAC RG ( d) " UAC ( d) a " C RIM UIC RL PRC IC " ( d) RL ( d) a " E E ( d) " Where: UAC UIC RG RL PRC E UACa Rla Uiliy avoided supply coss in year Uiliy increased supply coss in year Revenue gain from increased sales in year Revenue loss from reduced sales in year Program Adminisraor program coss in year Sysem sales in kwh, kw or herms in year or firs year cusomers Uiliy avoided supply coss for he alernae fuel in year Revenue loss from avoided bill paymens for alernae fuel in year (i.e., device no chosen in a fuel subsiuion program) 6

20 For fuel subsiuion programs, he firs erm in he B RIM and C RIM equaions represens he sponsoring uiliy (elecric or gas), and he second erm represens he alernae uiliy. The RIM es should be calculaed separaely for elecric and gas and combined elecric and gas. The uiliy avoided cos erms (UAC, UIC, and UAC a ) are furher deermined by cosing period o reflec ime-varian coss of supply: I UCA (" E MC : E K ) (" D MC : D K # # i i i i i I UAC a (Use UAC formula, bu wih marginal coss and cosing periods appropriae for he alernae fuel uiliy.) i i i ) UIC I ( $ E i # MC : Ei # ( K i " )) i i I ( $ D i # MC : D # ( K i " )) Where: [Only erms no previously defined are included here.] ΔEi Reducion in ne energy use in cosing period i in year ΔDi Reducion in ne demand in cosing period i in year MC:Ei Marginal cos of energy in cosing period i in year MC:Di Marginal cos of demand in cosing period i in year The revenue impac erms (RG, RL, and RL a ) are parallel o he bill impac erms in he Paricipan Tes. The erms are calculaed exacly he same way wih he excepion ha he ne impacs are used raher han gross impacs. If a ne-o-gross raio is used o differeniae gross savings from ne savings, he revenue erms and he paricipan's bill erms will be relaed as follows: RG BI * (ne-o-gross raio) RL BR * (ne-o-gross raio) Rla Aba * (ne-o-gross raio) 7

21 Chaper 4 Toal Resource Cos Tes 6 Definiion The Toal Resource Cos Tes measures he ne coss of a demand-side managemen program as a resource opion based on he oal coss of he program, including boh he paricipans' and he uiliy's coss. The es is applicable o conservaion, load managemen, and fuel subsiuion programs. For fuel subsiuion programs, he es measures he ne effec of he impacs from he fuel no chosen versus he impacs from he fuel ha is chosen as a resul of he program. TRC es resuls for fuel subsiuion programs should be viewed as a measure of he economic efficiency implicaions of he oal energy supply sysem (gas and elecric). A varian on he TRC es is he Socieal Tes. The Socieal Tes differs from he TRC es in ha i includes he effecs of exernaliies (e.g.,, environmenal, naional securiy), excludes ax credi benefis, and uses a differen (socieal) discoun rae. Benefis and Coss: This es represens he combinaion of he effecs of a program on boh he cusomers paricipaing and hose no paricipaing in a program. In a sense, i is he summaion of he benefi and cos erms in he Paricipan and he Raepayer Impac Measure ess, where he revenue (bill) change and he incenive erms inuiively cancel (excep for he differences in ne and gross savings). The benefis calculaed in he Toal Resource Cos Tes are he avoided supply coss, he reducion in ransmission, disribuion, generaion, and capaciy coss valued a marginal cos for he periods when here is a load reducion. The avoided supply coss should be calculaed using ne program savings, savings ne of changes in energy use ha would have happened in he absence of he program. For fuel subsiuion programs, benefis include he avoided device coss and avoided supply coss for he energy, using equipmen no chosen by he program paricipan. The coss in his es are he program coss paid by boh he uiliy and he paricipans plus he increase in supply coss for he periods in which load is increased. Thus all equipmen coss, insallaion, operaion and mainenance, cos of removal (less salvage value), and adminisraion coss, no maer who pays for hem, are included in his es. Any ax credis are considered a reducion o coss in his es. For fuel subsiuion programs, he coss also include he increase in supply coss for he uiliy providing he fuel ha is chosen as a resul of he program. 6 This es was previously called he All Raepayers Tes 8

22 How he Resuls Can be Expressed The resuls of he Toal Resource Cos Tes can be expressed in several forms: as a ne presen value, a benefi-cos raio, or as a levelized cos. The ne presen value is he primary uni of measuremen for his es. Secondary means of expressing TRC es resuls are a benefi-cos raio and levelized coss. The Socieal Tes expressed in erms of ne presen value, a benefi-cos raio, or levelized coss is also considered a secondary means of expressing resuls. Levelized coss as a uni of measuremen are inapplicable for fuel subsiuion programs, since hese programs represen he ne change of alernaive fuels which are measured in differen physical unis (e.g.,, kwh or herms). Levelized coss are also no applicable for load building programs. e presen value (PVTRC) is he discouned value of he ne benefis o his es over a specified period of ime. PVTRC is a measure of he change in he oal resource coss due o he program. A ne presen value above zero indicaes ha he program is a less expensive resource han he supply opion upon which he marginal coss are based. The benefi-cos raio (BCRTRC) is he raio of he discouned oal benefis of he program o he discouned oal coss over some specified ime period. I gives an indicaion of he rae of reurn of his program o he uiliy and is raepayers. A benefi-cos raio above one indicaes ha he program is beneficial o he uiliy and is raepayers on a oal resource cos basis. The levelized cos is a measure of he oal coss of he program in a form ha is someimes used o esimae coss of uiliy-owned supply addiions. I presens he oal coss of he program o he uiliy and is raepayers on a per kilowa, per kilowa hour, or per herm basis levelized over he life of he program. The Socieal Tes is srucurally similar o he Toal Resource Cos Tes. I goes beyond he TRC es in ha i aemps o quanify he change in he oal resource coss o sociey as a whole raher han o only he service erriory (he uiliy and is raepayers). In aking sociey's perspecive, he Socieal Tes uilizes essenially he same inpu variables as he TRC Tes, bu hey are defined wih a broader socieal poin of view. More specifically, he Socieal Tes differs from he TRC Tes in a leas one of five ways. Firs, he Socieal Tes may use higher marginal coss han he TRC es if a uiliy faces marginal coss ha are lower han oher uiliies in he sae or han is ou-of-sae suppliers. Marginal coss used in he Socieal Tes would reflec he cos o sociey of he more expensive alernaive resources. Second, ax credis are reaed as a ransfer paymen in he Socieal Tes, and hus are lef ou. Third, in he case of capial expendiures, ineres paymens are considered a ransfer paymen since sociey acually expends he resources in he firs year. Therefore, capial coss ener he calculaions in he year in which hey occur. Fourh, a socieal discoun rae should be used 7. Finally, Marginal coss used in he Socieal Tes would also conain exernaliy coss of power generaion no capured by he marke sysem. An illusraive and 7 Many economiss have poined ou ha use of a marke discoun rae in social cos-benefi analysis undervalues he ineress of fuure generaions. Ye if a marke discoun rae is no used, comparisons wih alernaive invesmens are difficul o make. 9

23 by no means exhausive lis of exernaliies and heir componens is given below (Refer o he Limiaions secion for elaboraion.) These values are also referred o as adders designed o capure or inernalize such exernaliies. The lis of poenial adders would include for example:. The benefi of avoided environmenal damage: The CPUC policy specifies wo adders o inernalize environmenal exernaliies, one for elecriciy use and one for naural gas use. Boh are saewide average values. These adders are inended o help disinguish beween cos-effecive and non cos-effecive energy-efficiency programs. They apply o an average supply mix and would no be useful in disinguishing among compeing supply opions. The CPUC elecriciy environmenal adder is inended o accoun for he environmenal damage from air polluan emissions from power plans. The CPUCadoped adder is inended o cover he human and maerial damage from sulfur oxides (SOX), nirogen oxides (OX), volaile organic compounds (VOC, someimes called reacive organic gases or ROG), pariculae maer a or below 0 micron diameer (PM0), and carbon. The adder for naural gas is inended o accoun for air polluan emissions from he direc combusion of he gas. In he CPUC policy guidance, he adders are included in he abulaion of he benefis of energy efficiency programs. They represen reduced environmenal damage from displaced elecriciy generaion and avoided gas combusion. The environmenal damage is he resul of he ne change in polluan emissions in he air basins, or regions, in which here is an impac. This change is he resul of direc changes in powerplan or naural gas combusion emission resuling from he efficiency measures, and changes in emissions from oher sources, ha resul from hose direc changes in emissions. 2. The benefi of avoided ransmission and disribuion coss energy efficiency measures ha reduce he growh in peak demand would decrease he required rae of expansion o he ransmission and disribuion nework, eliminaing coss of consrucing and mainaining new or upgraded lines. 3. The benefi of avoided generaion coss energy efficiency measures reduce consumpion and hence avoid he need for generaion. This would include avoided energy coss, capaciy coss and T&D line 4. The benefi of increased sysem reliabiliy: The reducions in demand and peak loads from cusomers oping for self generaion, provide reliabiliy benefis o he disribuion sysem in he forms of: a. Avoided coss of supply disrupions b. Benefis o he economy of damage and conrol coss avoided by cusomers and indusries in he digial economy ha need greaer han 99.9 level of reliable elecriciy service from he cenral grid c. Marginally decreased Sysem Operaor s coss o mainain a percenage reserve of elecriciy supply above he insananeous demand d. Benefis o cusomers and he public of avoiding blackous. 20

24 5. on-energy benefis: on-energy benefis migh include a range of program-specific benefis such as saved waer in energy-efficien washing machines or self generaion unis, reduced wase sreams from an energy-efficien indusrial process, ec. 6. on-energy benefis for low income programs: The low income programs are social programs which have a separae lis of benefis included in wha is known as he low income public purpose es. This es and he sepcific benefis associaed wih his es are ouside he scope of his manual. 7. Benefis of fuel diversiy include consideraions of he risks of supply disrupion, he effecs of price volailiy, and he avoided coss of risk exposure and risk managemen. Srenghs of he Toal Resource Cos Tes The primary srengh of he Toal Resource Cos (TRC) es is is scope. The es includes oal coss (paricipan plus program adminisraor) and also has he poenial for capuring oal benefis (avoided supply coss plus, in he case of he socieal es variaion, exernaliies). To he exen supply-side projec evaluaions also include oal coss of generaion and/or ransmission, he TRC es provides a useful basis for comparing demandand supply-side opions. Since his es reas incenives paid o paricipans and revenue shifs as ransfer paymens (from all raepayers o paricipans hrough increased revenue requiremens), he es resuls are unaffeced by he uncerainies of projeced average raes, hus reducing he uncerainy of he es resuls. Average raes and assumpions associaed wih how oher opions are financed (analogous o he issue of incenives for DSM programs) are also excluded from mos supply-side cos deerminaions, again making he TRC es useful for comparing demand-side and supply-side opions. Weakness of he Toal Resource Cos Tes The reamen of revenue shifs and incenive paymens as ransfer paymens, idenified previously as a srengh, can also be considered a weakness of he TRC es. While i is rue ha mos supply-side cos analyses do no include such financial issues, i can be argued ha DSM programs should include hese effecs since, in conras o mos supply opions, DSM programs do resul in los revenues. In addiion, he coss of he DSM "resource" in he TRC es are based on he oal coss of he program, including coss incurred by he paricipan. Supply-side resource opions are ypically based only on he coss incurred by he power suppliers. Finally, he TRC es canno be applied meaningfully o load building programs, hereby limiing he abiliy o use his es o compare he full range of demand-side managemen opions. Formulas 2

25 The formulas for he ne presen value (PV TRC )' he benefi-cos raio (BCR TRC and levelized coss are presened below: PVTRC BTRC - CTRC BCRTRC BTRC /CTRC LCTRC LCRC / IMP Where: PVTRC e presen value of oal coss of he resource BCRTRC Benefi-cos raio of oal coss of he resource LCTRC Levelized cos per uni of he oal cos of he resource (cens per kwh for conservaion programs; dollars per kw for load managemen programs) BTRC Benefis of he program CTRC Coss of he program LCRC Toal resource coss used for levelizing IMP Toal discouned load impacs of he program PC e Paricipan Coss The B TRC C TRC LCRC, and IMP erms are furher defined as follows: BTRC UAC " ( d) TC UAC a ( d) PAC " a CTRC PRC PC ( d) " UIC LCRC PRC PC ( d) " " TC IMP n ' %( & n ) ) ( i E i ) or (( D i where I peak $ period) " # ( d) [All erms have been defined in previous chapers.] The firs summaion in he BTRC equaion should be used for conservaion and load managemen programs. For fuel subsiuion programs, boh he firs and second summaions should be used. 22

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