Market Forces & Mother Nature: The Natural Gas Savings Challenge

Transcription

1 Market Forces & Mother Nature: The Natural Gas Savings Challenge Ed Carroll, Franklin Energy, Madison, WI Tom Syring, Franklin Energy, Madison, WI Dean Laube, Franklin Energy, Eau Claire, WI Mike Marks, Applied Energy Group, Islandia, NY ABSTRACT This paper discusses challenges and solutions for natural gas utilities to achieve gas saving goals in the current operating environment, where gas is inexpensive, winters are trending warmer and federal efficiency standards are increasing for some measures that traditionally were part of gas saving portfolios. First, this paper explores these challenges and solutions with specific program examples from the Midwest by presenting information from start-up to current program status. Second, it compares and contrasts this information with more mature gas programs as a means to discuss differences in natural gas programs from a regional and program lifecycle standpoint. It closes with a set of proposed methods for meeting current natural gas saving challenges. Introduction Utility-sponsored natural gas efficiency programs have operated for 30 years in North America. The original focus of early programs was often on residential customers, especially low income households. Natural gas saving efforts have since evolved to the point that programs currently exist in 41 states, serving all customer sectors in 23 of those 41 states. Recently, budgets for gas programs have increased dramatically. Utility spending for gas programs totaled $125M in 2005, increased to $942M in 2010, and hit an estimated $1.3B in This represents a tenfold increase in only seven years. Correspondingly, annual natural gas savings increased from 89 million therms in 2005 to 529 million therms in The major change driving program spending and savings is the establishment of state Energy Efficiency Resource Standards (EERS) with specific savings targets. As of 2012, twelve states had natural gas EERS. Previously, most natural gas programs were based on budgets and cost-effective implementation, with savings as an outcome, not a driver. EERS require programs to achieve higher savings and sustain high savings levels for years. Along with other factors discussed below, EERS are forcing program managers to reach new customers and to achieve more savings per participating customer. Not long after the establishment of aggressive natural gas saving goals, natural gas prices began to fall dramatically, as depicted in Figure CEE: Consortium for Energy Efficiency (Wallace, P. & Forster, H.) 2011 State of the efficiency program industry. 2 ACEEE: American Council for Energy Efficient Economy (York, D., Witte, P., Friedrich, K., and Kushler, M.) A national review of natural gas energy efficiency programs, Report Number U EIA: Energy Information Administration, September 2012 Annual Energy Review.

2 Figure 1: 20 Year Natural Gas Prices Current Challenges to Aggressive Gas Saving Goals Over the past three years, natural gas efficiency program designers and implementers have faced three major challenges in achieving savings goals: 1) low natural gas prices, 2) warmer winters and correspondingly lower use per customer, and 3) changes in federal equipment and building shell codes and standards. Savings Challenge #1: Low Gas Prices Over the past ten years, North American energy companies have developed advanced technologies to improve the production of natural gas from shale layers. This process, known as fracking, involves hydraulic fracturing of shale formations to ease and increase the withdrawal of natural gas. Strong production of shale gas is a primary reason for the low natural gas prices U.S. consumers have enjoyed since early U.S. shale gas production grew at an average annual rate of 17% between 2000 and Advanced technology in shale gas production resulted in an average annual growth rate nearly three times that rate 48% between 2006 and Looking forward, the EIA predicts shale gas production to grow by almost threefold from 2009 to Strong production and a warm winter resulted in very low prices by the end of 2011, and a tenyear low of less than $2.00/MMBtu was reached in March Nationally, there were variations in natural gas prices, notably in New York and Boston, ostensibly due to natural gas transport constraints. Northeast prices spiked in the winter of 2011 due to cold weather and in the summer due to natural gas demand for power generation. 5 Low gas prices have two major impacts on natural gas programs and measures. First, they make the payback to the participant longer. Second, they lower the avoided commodity cost and thus reduce the benefit cost test result. 4 EIA Annual Energy Outlook EIA Natural Gas Year in Review 2011

3 Savings Challenge #2: Warmer Winters While there is ongoing debate about long-term weather trends, the winter of 2011 to 2012 was definitely warmer across the majority of the United States. As noted in Figure 2 below, populationweighted heating degree days (HDDs) 6 were down 18% to 36% relative to monthly historical norms. The exception was the Pacific region, which was slightly cooler than normal. Figure 2: HDD Comparison Winter 2011/12 to Norms Not only does warm weather decrease gas use, it also puts less stress on gas-fired space heating equipment, leading to reduced need for replacement. And replacement underlies a significant savings opportunity in many natural gas efficiency programs. 7 Savings Challenge #3: Changes in Federal Efficiency Standards In June 2011, the U.S. Department of Energy issued updated standards for a variety of equipment. The new standards will significantly impact utility programs starting in For example, nonweatherized (i.e. indoor) furnaces will have a baseline efficiency increase in 2013 in the Northern region, defined as states having greater than 5,000 Heating Degree Days. Based on a 2011 survey of utility program administrators running natural gas programs, 90% of respondents indicated furnaces were part of their residential program, and 62% indicated furnaces were part of their commercial program. 8 The U.S. DOE estimates that half of the U.S. sales of furnaces are 90% AFUE or better 9. This change, understandable from a federal standpoint, will force program designers and implementers to find alternative gas saving measures to replace a very common measure found in current programs. 6 EIA uses population weighting to help forecast energy use; energy consumption in a region is based both on weather patterns and the population changes over time. 7 EIA Today in Energy, 4/19/12 8 Consortium for Energy Efficiency, State of the Efficiency Program Industry Budgets, Expenditures, and Impacts Appliance Standards Awareness Project: AC, Heat Pump and gas Furnace Standards, June 2011

4 Impacts on Cost Effectiveness and Natural Gas Program Success Most states with EERS have a cost-effectiveness requirement, which measures the long-term benefit of natural gas savings compared to program costs to achieve those savings. The challenges discussed above affect that benefit/cost (B/C) calculation, impacting measures within a program, or in some cases, impacting the cost-effectiveness of an entire natural gas program. As goals increase, the average cost per unit of energy saved generally increases as well. A well-used analogy for this phenomenon is picking the low hanging fruit ; it is easier to harvest the low hanging fruit and increasingly more difficult to reach the fruit higher in the tree. Even more of concern is the fact that as the program goes after more expensive measures, the program may not pass the prevailing B/C test required. For the purposes of this paper, we first provide some context on typical natural gas program costs from a recent benchmarking analysis, followed by a description of two utility natural gas programs: one a mature utility program (operating ten plus years), and the other a program just getting underway (operating for four years or less). In both examples we will discuss the major challenges the utilities are facing. Benchmarking Natural Gas Efficiency Program Cost Ranges An analysis of 14 natural gas energy efficiency programs found that the cost of energy efficiency ranges from $12 to $48/MMBtu saved, with an average of $30/MMBtu. It is notable and fairly consistent for the first year cost of natural gas efficiency programs to be higher than the average customer price of natural gas; however, as explained below, natural gas programs are often cost-effective and still make sense to promote from a life cycle perspective. The seven states reviewed have EERS with goals that vary from annual targets that ramp up by 0.2% of customer sales each year in Illinois to cumulative long-term goals such as the 15 by 15 (15% by 2015) goal in New York. A review of 2010 and 2011 DSM performance data was analyzed on both a portfolio and sector basis. The programs were compared on a $/MMBtu basis, or the cost of energy efficiency (natural gas spending / natural gas savings). Results are summarized in Table 1 and Figure 3 below. Table 1: Benchmark Analysis Summary, ($/MMBtu) Total Portfolio Residential Sector Non-Residential Sector Minimum $12 $15 $5 Average $30 $37 $19 Maximum $48 $56 $36 Figure 3: Detailed Benchmark Analysis ($/MMBtu)

5 2010 Dollar per MMBtu Saved $50 $40 $30 $20 $10 $ Mature Program: Xcel Energy - Minnesota Minnesota has a long history of electric and natural gas energy efficiency programs. The Minnesota Legislature enacted the Conservation Improvement Program (CIP) in 1982, requiring natural gas and electric utilities to invest a portion of their revenues in energy efficiency and conservation programs. Natural gas utilities were required to invest 0.5% of gross operating revenues. In 2007, the state passed The Next Generation Energy Act of 2007 ( NGEA ) which established an energy savings goal of 1.5% of average retail sales for each electric and gas utility beginning in It was quickly understood that 1.5% was too aggressive a goal for the natural gas utilities, and in 2009, the Minnesota Legislature established an interim savings goal of 0.75% over for qualifying natural gas utilities. For years following 2013, the gas utilities have been asked to reach the 1.0% level. Between 1990 and 2011, Xcel Energy invested over $1 billion in electric and natural gas efficiency, saving an estimated 11,174,165 MMBtu. Xcel Energy s natural gas portfolio includes commercial, industrial, residential, low-income, and pilot programs as well as funding for research, evaluation, and planning. Figure 4: Xcel Energy s CIP Achievements and Plan, Xcel Energy. 2013/2014/2015 MN Electric and Natural Gas CIP. Docket E,G002/CIP

6 Xcel Energy s CIP expenditures have increased significantly from 2000 through Figure 4 illustrates that natural gas savings increased rapidly through 2005 and have decreased since. The decrease coincides with the timing of the natural gas price drop. As shown in Table 2, Xcel Energy s cost of energy efficiency is increasing as the average customer price has decreased. The average cost of energy efficiency increased from $4.75 per MMBtu saved in 2007 to $13.64 per MMBtu saved in 2011 while the average customer price decreased from $10.25 in 2008 to $7.57 in Table 2: Xcel CIP Achievement ($/MMBtu) Total CIP 11 $4.75 $7.32 $7.60 $12.04 $13.64 Average Customer Price 12 $9.57 $10.25 $7.74 $7.57 Although the cost of energy efficiency has been consistently higher than the average customer price, Xcel Energy s CIP has remained cost-effective. The societal, participant, and ratepayer costeffectiveness have remained stable from 2007 through This is due to a number of factors including the addition of a low cost behavior change program. Table 3: Xcel Energy Cost-Effectiveness Benefit-Cost Total Program Test Societal Participant Ratepayer Utility Newer Program: Peoples Gas / North Shore Gas - Illinois Illinois legislation established a natural gas energy efficiency resource standard (EERS) in Public Act required natural gas utilities to implement cost-effective energy efficiency programs to meet specific saving requirements. Annual savings targets, based on 2009 customer deliveries, begin at 0.2% in 2012 and increase to cumulative savings of 2.0% in 2015 and 8.6% in Utilities must file an efficiency plan every three years. North Shore Gas Company and Peoples Gas Light and Coke Company ( Peoples Gas ) have offered natural gas efficiency programs since While North Shore and Peoples Gas merged in 2006, the utility energy efficiency programs remain separate. The natural gas portfolio includes provisions for residential, multifamily, small commercial and industrial customers. This discussion focuses on the Peoples Gas program. As shown in Table 4, Peoples Gas cost of energy efficiency has decreased with the average customer price. The average customer price is calculated as the utility customer revenue per unit natural gas consumed. Part of that reduction has to do with additional emphasis on business customer projects versus residential projects as the Peoples Gas portfolio has grown. 11 Northern States Power Company (Xcel Energy). Status Report & Associated Compliance Filings. Minnesota Electric and Natural Gas Conservation Improvement Program. Docket Nos. E,G002/CIP and CIP U.S. Energy Information Administration. Natural Gas Annual Respondent Query System (EIA-176).

7 Table 4: Peoples Gas Achievement ($/MMBtu) Average Peoples Gas 14 $49.16 $47.95 $15.04 Average Customer Price $9.68 $9.59 Although the cost of energy efficiency is higher than the average customer price, the Peoples Gas portfolios have proven cost-effective. New programs often have a time lag as a new team works through start-up learning curves and costs. As these portfolios have matured and program efficiencies were realized, many low-cost measures were implemented, and the cost of energy efficiency has been decreasing annually. Different Challenges Posed by Mature vs. New Programs In the examples shown above, Xcel Energy s challenge has been to expand a mature portfolio to reach higher goals. This challenge has been made much more difficult in the environment of low gas prices, warmer winters and changes in standards. Even without higher goals, Xcel has been hard pressed to maintain the savings levels they have always produced without significant increases in cost. Couple this with higher goals, and the challenge becomes even more daunting. Peoples Gas is in a ramp-up mode and has the luxury of more modest goals while it undertakes the challenge of developing the infrastructure required for successful program implementation. However, even modest goals can be difficult to attain with low gas prices, warmer winters, and changes in standards. As with most new utility programs, cost is a major concern and achieving savings without breaking the bank is a central issue. Xcel Energy and Peoples Gas share the common concern of providing programs that pass B/C tests. Low avoided gas costs related to the low natural gas cost has pushed many energy efficiency measures to the bubble with regard to passing the required B/C test (e.g. Total Resource Cost). The Future of Gas Programs and Strategies for Navigating Current Challenges Speculation about the future of natural gas saving programs can lead to multiple conclusions. A myopic view based solely on the current challenges suggests a bleak outlook for the future viability of natural gas efficiency programs. A more optimistic view based on some apparent future trends suggests that gas efficiency programs will persist. The primary drivers of this predicted persistence include price volatility and the potential rebalancing of supply and demand leading to price increases as natural gas becomes the fuel of choice for future electric generation. $7.00/MMBtu? As surprising as it may seem, the United States is not that far from $7.00/MMBtu natural gas. Five key issues may drive natural gas prices upward in the near future: 1) significant increases in natural gasfired electric generation, 2) weather changes including more frequent storms, 3) economic and manufacturing recovery, 4) high global prices for natural gas, and 5) environmental risks associated with unconventional production of natural gas. 13 Programs are run from June to May. 14 Peoples Gas Light and Coke Company. Energy Efficiency Program. Docket Nos , , and

8 1. Significant Increases in Natural Gas-fired Electric Generation. The next few years will see more pressure on electric utilities to replace coal with natural gas as a primary fuel, driven by both pricing and environmental factors. This additional demand will likely correct the supply and demand balance and support a bullish market 15. The EIA reports that low prices are leading to natural gas consumption records, with the demand from electric generation leading the way. EIA reports than in 2011, more than 25% of electric generation was fueled by natural gas. 16 The loads that multiple new combined cycle natural gas generating facilities require will help drive overall demand even higher. 2. Weather & Storms. Weather impacts have a strong influence on pricing and speculation. As illustrated by Hurricane Sandy, extreme weather is becoming more and more common. Hurricanes Katrina and Rita directly impacted the gas industry, and unfortunately, similar events appear likely in the future. In 2012, most of North America experienced a very hot and dry summer, leading to high air conditioning loads. Demand for natural gas for generation increased 25.3% in June 2012 compared to June 2011, primarily due to the need for peak power for air conditioning Economy & Manufacturing Recovery. Through their energy efficiency program implementation efforts, the authors spend time with a wide variety of manufacturing end-use customers, many of whom are still recovering from the epic economic downturn of The majority of these customers feel they are back on their feet and are optimistic about the future of their businesses. Since natural gas is the fuel of choice for U.S. industry, a manufacturing resurgence will add another pressure point for natural gas consumption in the years to come. 4. Global Prices for Natural Gas. Another less noticed issue that could have an influence is the global price of natural gas. Currently, the United States has the least expensive natural gas price in the world. As developing and developed countries look to drive down operating costs, they are investigating low cost options from exporters willing to ship natural gas into the more lucrative markets of Europe and Asia. U.S. producers that extract and sell natural gas in the United States for $2.00/MMBtu will entertain selling that same commodity abroad at six to seven times that value. This apparent trend is supported by U.S. liquefied natural gas terminals re-tooling to become exporters rather than importers. 5. Environmental Risks. Finally, there is debate over the environmental risks associated with hydraulic fracking. To many areas of the country, fracking has proven to be a perfectly timed economic boost. One can quickly see the impact that fracking has had on natural gas commodity pricing. However there is a less visible item that impacts natural gas consumption: the sand needed to drive the fracking process. Sand mines are quickly popping up across the country, adding substantial electric and natural gas loads to many utility distribution systems. Both come with positive economic impact but carry potential environmental issues that could quickly put a damper on a booming industry. International Energy Agency (IEA) forecasts suggest that total gas production will grow by 55% between now and 2035, where unconventional supplies (i.e. fracking) account for almost two-thirds of the growth. Concerns remain that fracking can result in environmental and social damages, with risks of both air and water pollution. 18 If several of the above scenarios occur simultaneously, the United States could quickly move from current low natural gas prices back to recent highs. Just a few years ago, $7.00/MMBtu was the norm. 15 References for additional information include 16 EIA Natural Gas Monthly August 2012, Release Date 8/31/12 17 EIA Natural Gas Monthly August 2012, Release Date 8/31/12 18 International Energy Agency, Golden Rules for a Golden Age of Gas. World Energy Outlook Special Report on Unconventional Gas

9 The original jump to get to that mark created an excited industry buzz that grew into a roar by the time prices went $12.00/MMBtu. The next time around, the mood may be more subdued, since those levels have been seen before. One fear for many is that after hitting new price peaks it may be much harder to return to abundant low cost natural gas. Following Hurricane Sandy, The governor of New York and mayor of New York City both proclaimed that severe storms, regardless of the cause (including climate change), are a reality that must be part of future planning. It is difficult to imagine that climate change will not drive future decisions and government policy regarding energy. While there are plenty of reasons to believe natural gas efficiency programs will persist, the current challenges call for new solutions for meeting savings goals. Navigating the Challenges: Some Near-Term Gas Saving Program Strategies To meet high and increasing natural gas saving goals, utility program planners and implementers are using a variety of strategies to navigate the near-term challenges of low cost gas, warmer winters, and increasing federal appliance standards. Key strategies include: 1. Increase Incentives to cover more of the project or incremental cost of gas efficiency measures 2. Balance Ally and Customer Outreach, Education and Awareness emphasizing both customer and ally awareness, and educating both on current pricing and long-term trends 3. Bundle Efficiency Measures pair less cost-effective measures with more cost-effective measures 4. Plan and Implement Joint Gas and Electric Programs synergies in the same technology or overlap in savings potential a create symbiotic or cost-effective relationships 5. Develop Niche Technologies and Services that Cater to Localities diving deeper to find natural gas technologies and/or services that are a niche for a region Savings Strategy #1: Increase Incentives. As commodity costs fall, customer payback periods increase, making energy efficiency measure implementation less likely. Program implementers know the hard lessons of losing projects due to insufficient rate of return or missing simple payback requirements. Increasing incentives helps overcome these barriers, while allowing the utility program to meet B/C requirements such as the Total Resource Cost Test (TRC). Since the full measure cost is included, the TRC is not impacted by the incentive level. However, the increase does impact ratepayer cost and the cost per MMBtu saved. Another option is to offer limited time higher incentives. Time sensitive bonuses can gain attention in the marketplace at crucial times of the year. A strong example is tying a bonus to a furnace/boiler tune up program just prior to the heating season. Trade allies benefit by spacing out tune-up appointments, the program benefits from immediate savings and identifying other measures, and the customer benefits from planned maintenance versus potential down time. Savings Strategy #2: Balance Ally and Customer Outreach, Education and Awareness. It is critical to work with allies and end-use customers to provide unbiased information about the current economic environment for natural gas, including historic trends. While natural gas prices have fallen dramatically in recent years, price volatility remains high, particularly within the residential sector. Natural gas prices have large swings in both the near and long term, which is valuable information for customers when deciding on equipment efficiency levels. A balance of contractor-driven and customer-friendly programs has a track record of success in many areas of the country, and Midwestern utility programs have been leaders in this area. Two programs that have effectively tied the knot between education and ally involvement include Xcel Energy in Minnesota and Focus on Energy in Wisconsin. Xcel Energy employs staff to conduct and maintain trade

10 ally outreach, training, and communication. The outreach can include a monthly newsletter, quarterly training, or periodic program updates, as all can be crucial to a successful program. Wisconsin s Focus on Energy has relied heavily on program ally involvement to attain savings goals. Currently, this program is rolling out specific trade ally training for HVAC roof-top unit tune-ups. This innovative program offer is directly linked to trade ally education and involvement. Involving the trades in planning and program design, including feedback sessions, fosters a strong cooperative environment, creates a high level of trade ally buy-in, and leads to successful program implementation. Another area of interest tied to education is the sponsorship of Building Operator Certification (BOC) by local utilities. The BOC program provides participants with knowledge to operate their buildings efficiently while improving occupant comfort. Classes target all fuels and a variety of building types. BOC graduates are shown how to operate their facilities at a lower Btu/square foot than nonparticipants 19. Strategy #3: Bundle Efficiency Measures Together. A very effective way to increase savings is to bundle several measures together. As noted, low avoided gas costs can result in measures that fail to pass B/C tests. Bundling less cost-effective measures with more cost-effective measures can create a costeffective package that is more attractive for the customer. Gas utilities are pursuing this bundling approach with examples such as furnace and water heater replacement packages or less obvious pairings such as building envelope improvements and mechanical upgrades. For commercial customers, some utilities are strategically bundling measures through an assessment program. Program energy experts visit customers facilities, identify a mix of short-term payback and longer-term payback projects, and recommend a bundle of projects. This can create a strong case for the package, which may include long payback measures that do not meet customer criteria when considered alone. This strategic design allows assessment programs to guide customers toward installation of multiple measures. Since residential and commercial customers typically make natural gas efficiency decisions once every ten years, it is important to get the most efficient equipment possible at the decision point. Examples of success with this strategy include: Minnesota Energy Resources Turn-Key program, Mid-American Business Check program, Focus on Energy s Multifamily Energy Savings program. The Multifamily Energy Savings program has achieved great results by combining bundling with higher incentives to move a stubborn market. A related option is to highlight the non-energy benefits related to energy efficiency measures. The Peoples Gas program highlighted above is working to educate customers about pending City of Chicago water supply and sewer fee increases and promoting measures that save both on domestic hot water and the water bill. Savings Strategy #4: Plan and Implement Joint Gas and Electric Programs. For two-fuel utilities, it is common to offer both electric and gas saving measures. While more challenging, it is possible for separate gas and electric utilities to cooperate in implementing joint programs. Benefits of combining electric and natural gas efforts include improved B/C ratios from shared implementation and marketing costs and simplification for program participants. Illinois investor owned utilities are leaders in this area and have successfully offered joint programs ranging from residential prescriptive offerings, multifamily, small business, and large customer retro-commissioning services. 20 Some measures have both natural gas and electric benefits, lending themselves to joint delivery. An example is condensing furnaces with high efficiency blower motors. In 19 Midwest Energy Efficiency Alliance More detail on this concept is found in the ACEEE paper Improving Cost Effectiveness by Coordinating with Gas Utilities George Malek, ComEd, Oakbrook Terrace, Illinois

11 addition to benefits to the utilities, customers and allies benefit from the simplicity of a joint program serving both fuels and end uses. Simply removing the barrier of needing to access multiple programs makes participation easier, increasing results and achieving high customer satisfaction. Savings Strategy #5: Develop Niche Technologies and Services that Cater to the Local Region. While many measures can lead to program savings regardless of location, there are niche measures and approaches that fit specific localities or regions. An example of this approach is the Peoples Gas program involving energy management systems and balancing strategies for single pipe steam systems in multifamily buildings 21. While this measure is not applicable in most markets, older urban markets with a high saturation of single pipe systems can greatly benefit. By listening to local customers and allies, and acting to create these niche offers, program planners are navigating some of the challenges posed by the loss of tried-and-true technologies due to standard changes. This combination of identification of niche measures coupled with willing allies has led to recent success for the Peoples Gas program. Another example of niche market support coupled with a joint program is an offer of multiple compressed air prescriptive rebates that save electricity but are now saving natural gas. A high level of involvement from the trade ally sector led to the creation of a prescriptive measure for air cooled compressor heat recovery. This offer fits perfectly for the climate as well as the majority of compressor installations throughout the utility service territory. Finally, the best programs are often homegrown. Fitting the offer to the situation is more successful than trying to make the situation fit the offer. Recent successes have been made by approaching industrial customers during the current down times. Apparently, this slow time can allow customers to take a breath and consider suggestions, which is often difficult during periods of high activity. Understanding the local market and its obstacles and barriers is crucial to program design and delivery. Identifying barriers up front and working with the market and contractors to limit or remove them can be a key to goal achievement. 21 Peoples Gas.