MEMORANDUM. Framework for developing the City s Ten-Year Energy Efficiency Targets for the period 2014 to 2023

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1 MEMORANDUM TO: FROM: UTILITIES ADVISORY COMMISSION UTILITIES DEPARTMENT DATE: JUNE 6, 2012 SUBJECT: Framework for developing the City s Ten-Year Energy Efficiency Targets for the period 2014 to 2023 This report is for the Commission s information only, no action is required. Summary This report provides a review of the methodology and assumptions that are being used to estimate the City of Palo Alto s electric and natural gas ten-year energy efficiency (EE) potential. The assessment will update the annual targets for energy efficiency savings and demand reduction potential for the period 2014 to Electric EE targets for 2011 to 2020 were last adopted by City Council in May 2010, while gas EE targets were adopted in April An update of the ten-year electric EE targets is due to NCPA by March 2013 for filing with the California Energy Commission by June 1, Background As mandated by state law, publicly-owned electric utilities are required to identify all potentially achievable cost-effective electricity efficiency savings and to establish annual targets for energy efficiency savings and demand reduction over 10 years. 1 The ten-year energy savings and demand reduction targets are required to be updated every three years to reflect changes in technologies, building codes, equipment standards, energy cost, etc. History of Energy Efficiency Target Setting in Palo Alto The City of Palo Alto Utilities (CPAU) has offered energy and water efficiency and conservation programs since the 1970s and has long recognized cost-effective EE as the cheapest and cleanest alternative to meeting energy needs. In April 2007, the City Council adopted EE targets of 3.5% of electric and gas load for the ten-year period from 2008 to The targets were developed based on a 2005 study by Rocky Mountain Institute that estimated the electric and gas efficiency potential and the cost of EE. This met the state legislative requirements established by AB 2021 (2006) requiring publicly owned electric utilities to adopt ten-year 1 AB2021, Ch. 734 (2006) Page 1 of 10

2 electricity efficiency savings targets by June 1, 2007 and every three years thereafter. There is currently no state mandate that requires gas utilities to set efficiency goals. In late 2009/early 2010, CPAU, in collaboration with other NCPA members, engaged a consultant to re-evaluate the electric EE potential within Palo Alto. Based on the analysis results, in May 2010 (CMR 218:10) the City Council adopted a cumulative ten-year electric EE savings goal of 7.2% by 2020, or double the previous target. A similar analysis was done to evaluate the gas EE potential. In April 2011(Staff Report #1532), City Council adopted a 10-year cumulative gas efficiency target of 5.2%, up from the previous target of 3.5%. Table 1 provides a summary of the EE goals and achievements from Fiscal Year (FY) 2008 through FY The table illustrates that actual program achievements have exceeded goals for most years. Table 1: Electric and Gas Efficiency Achievements for FY FY 2008 (Actuals) FY 2009 (Actuals) FY 2010 (Actuals) FY 2011 (Actuals) Electric Efficiency Goals Annual electric savings (MWh) 2,500 2,800 3,500 5,799 Percent of Annual load 0.25% 0.28% 0.31% 0.60%* Electric Efficiency Achievements Annual electric savings (MWh) 4,399 4,668 5,269 6,457 Percent of Annual load 0.44% 0.47% 0.55% 0.68% Gas Efficiency Goals Annual gas savings (therms) 76,800 86,400 99, ,743 Percent of Annual load 0.25% 0.28% 0.32% 0.40%* Gas Efficiency Achievements Annual gas savings (therms) 35,238 88, , ,198 Percent of Annual load 0.11% 0.28% 0.39% 0.55% + * The FY 2011 efficiency goals were based on the 2010/2011 EE goals update. + Half of these savings came from the Home Energy Reports. What counts towards Energy Efficiency Potential Energy efficiency can achieved through multiple paths. First, at the federal and state level, building codes and appliance standards establish minimum efficiency levels for a broad range of construction and appliance/equipment types. As an example, the Energy Policy Act of 2005 sets new minimum ballast efficacy factor for T12 fluorescent lamps, while the Department of Energy (DOE) establishes minimum efficacy level (lumens per watt) for commercial fluorescent lamps which essentially bans the manufacture of traditional T12 lamps beginning July 14, Second, at the utility level, EE program interventions are designed to help customers overcome barriers to invest in EE. Utility programs can be in the form of customer rebates for purchasing and installing qualifying appliances and equipment, on-site energy audits to educate the Page 2 of 10

3 customer on various cost-effective retrofit opportunities to reduce energy usage, zero- or lowinterest loan programs, as well as various outreach and education activities. Third, at the individual level, consumers face many choices when purchasing appliances and remodeling their homes. Utility bill savings, comfort level, and environmental awareness are some of the factors that influence the consumer s choice. Some consumers will choose energy efficient products regardless of the availability of utility rebates, but, nonetheless, will apply for the rebate. These customers are known as free-riders. Energy savings achieved through individual choices in the absence of utility rebates are defined as naturally-occurring. For the purpose of defining the EE potential for a utility, only energy savings that can be achieved through utility intervention can be included. This excludes the savings attributable to improved building codes and appliance standards, as well as naturally-occurring energy savings. Figure 1 shows the estimated energy savings attributed to utility efficiency programs, building standards and appliance standards between 1975 and 2003 in California. The amount of electric energy saved in 2003 is approximately 15% of the electricity used in California that year. More than half of these savings come from the building and appliance standards implemented by the California Energy Commission. Figure 1. Attribution of Electric Efficiency Savings ~ 15% of Annual Electricity Use in California in 2003 Utility Efficiency Programs Building Standards Appliance Standards Source: California Energy Commission, July 2005, Implementing California s Loading Order for Electricity Resources, CEC Definition of Technical, Economic and Market Potential The first step in developing EE goals is to determine the potential for EE savings. EE potential can be described as technical, economic, or market potential. These levels of potential will be explained by using the example of residential gas water heaters. A typical 50-gallon gas water heater available for purchase has an Energy Factor of A minimum Energy Factor of Page 3 of 10

4 0.67 is required to qualify for Energy Star certification. The most efficient gas water heaters are condensing water heaters with Energy Factor of 0.80 or higher. The technical potential for residential gas water heating assumes that all gas water heaters in the City are replaced with condensing water heaters, which is estimated to reduce gas usage for water heating by 30%. Despite the significant potential gas savings of condensing water heaters, condensing water heaters are not cost-effective from a societal perspective, due to their significantly higher upfront cost to purchase and install than for high efficiency gas water heaters. The economic potential then only considers cost-effective replacements and is estimated to reduce gas usage for water heating by 8%. From a consumer perspective, the payback for a high efficiency gas water heater based on the incremental equipment cost and annual bill savings is estimated at 8 years. The long payback period and the fact that plumbers often do not carry high efficiency gas water heater models are both barriers to achieving the gas savings. The market potential for residential gas water heating takes into account such market barriers and is estimated to reduce gas water usage by around 4%. To summarize, technical potential is the total energy savings by installing all of the most efficient equipment that is commercially available. If the non-cost-effective equipment is screened out, the remaining energy savings represents the economic potential. Market potential is a subset of the economic potential that reflects the reality of customers awareness and willingness to adopt energy efficient equipment. The EE targets adopted in 2010 and 2011 were based on the estimated market potential for each measure. The 2010 EE potential study estimated the technical, economic and market potential for electric efficiency to be 27%, 26% and 7%, respectively, of the City s electric load in the year For gas efficiency potential, this was estimated to be 45%, 34% and 5.5% of the City s gas load in The EE targets adopted in 2010 (for electricity) and 2011 (for gas) were based on the estimated market potential for each measure. The 2010 EE potential study results are summarized in Figure 2 and Figure 3. Page 4 of 10

5 Million Therms MWh 300, ,000 Figure 2. Electric Efficiency potentials from 2010 EE potential study 27% Electric Efficiency Potential Summary 26% Percentages show EE potential relative to load forecast in , , ,000 7% 50,000 - Technical Economic Market in year Figure 3. Gas Efficiency potentials from 2010 EE potential study 45% Gas Efficiency Potential Summary Percentages show EE potential relative to load forecast in % Commercial Sector Residential Sector 5.5% 0 Technical Economic Market Discussion Overview of the Energy Efficiency Potential Model For the 2012 EE potential update, staff has contracted with Navigant Consulting to estimate the technical, economic and market potential for electric and gas efficiency within the City of Palo Alto. The model establishes 2006 as the base year and projects the energy efficiency potential for 2014 to 2023, taking into account past EE program achievements, as well as the 2013 Building Efficiency and Appliance Standards that will take effect in Page 5 of 10

6 To determine the cost-effectiveness of an energy efficiency technology (or EE measure), the avoided energy cost is compared against the technology cost and utility administrative cost. A benefit-cost ratio greater than 1 indicates that the measure is cost-effective. For electric EE measures, the avoided energy cost used is the cost of renewable energy plus avoided transmission and distribution losses. For gas EE measures, the avoided energy cost is based on forward gas prices plus the carbon adder as specified in the City s Climate Protection Plan plus avoided distribution losses. The EE potential model uses a bottom-up approach. It starts with an estimated number of households for the residential sector and estimated square footage for the commercial sector within Palo Alto. For each household or commercial square foot, the model then estimates the density of various energy-using equipment (e.g. one refrigerator per household) and the penetration of energy efficient models within the equipment category (e.g. 17% of refrigerators are Energy-Star models). These estimations are based on statewide survey results for Palo Alto s climate zone. Energy saving assumptions for various EE measures are mostly drawn from the Database of Energy Efficiency Resources (DEER) which is maintained by the California Public Utilities Commission and was last updated in late Changes since the 2010 Energy Efficiency Assessment Since the 2010 EE target update, both gas and renewable electricity energy prices have declined significantly, as illustrated in Figure 4. Lower market prices for electricity and natural gas translate to lower benefits for each unit of EE savings. EE measures that were previously costeffective may no longer be so. This could impact the economic potential as fewer measures may pass the cost-effectiveness screen. Page 6 of 10

7 $/MWh Figure 4. Comparison Electric of and Electric Gas Avoided and Gas Costs Avoided from Costs for the 2010 and and 2012 EE EE potential Potential assessment $/therm Electric avoided cost from 2010 EE assessment $/MWh Electric avoided cost for 2012 EE assessment $/MWh Gas avoided cost from 2010 EE assessment $/therm Gas avoided cost for 2012 EE assessment $/therm * Note: Electric avoided costs include renewable energy cost, transmission and distribution costs and local capacity costs, Gas avoided costs include wholesale gas cost at PG&E Citygate, local transportation costs and carbon adder as specified in the 2007 Climate Protection Plan Changes to customer gas rates effective July 2012 will likely impact customers adoption of gas EE measures. The change to the gas supply rate, along with the proposed increases in the gas distribution rate, is estimated to result in a 15% to 25% reduction for residential and small customers gas bills. However, large commercial customers gas bills are expected to increase. In the near term, lower retail gas rates for residential and small commercial customers will increase the payback period for gas efficiency investment, which in turn raises the adoption barrier for EE. The opposite may be true for large commercial customers. There are a number of enhancements to the 2012 EE potential model, as highlighted below: 1. The 2012 model covers both electric and gas efficiency measures. In the past, electric and gas EE potential were estimated using different calculation models. The integration of both electric and gas measures facilitates the process of examining both the electric and gas EE potential simultaneously. 2. The 2012 model takes into account interactive effects of efficiency measures. For example, the installation of more efficient lighting system which emits less heat increases the building heating load during winter months and reduces the cooling load during summer months. Page 7 of 10

8 3. The 2012 model captures the potential impacts of behavioral programs. Behavior-based energy efficiency programs such as OPOWER s Home Energy Report 2 deliver energy savings by motivating customers to operate their energy-using devices more efficiently. Examples include running only full loads of dishes and laundry, reducing pool pump run times, changing programmable thermostat set-points and unplugging vampire loads. These behavioral savings potentials were largely ignored in the 2009 EE potential study. In the last two years, there are some notable changes to a number of high impact EE measures that have contributed substantial energy savings. These include: 1. The minimum efficacy (lumens per watt) of commercial fluorescent lighting has been increased as mandated by the Department of Energy, effective July Most T12 lamps will not meet the new efficiency requirement and can not be manufactured past July Therefore, the countable savings for replacing T12 lamps are significantly reduced. 2. A recent lighting study estimated lower per unit savings assumptions for residential Compact Fluorescent Lights (CFLs) due to lower hours of operation as well as lower lighting density (i.e. fewer sockets per household) as verified by recent metering study Energy savings attributable to refrigerator recycling has been lowered from 1,946 kwh per unit to 605 kwh per unit. The refrigerator recycling program has been in place since Over the past 5 years, the stock of refrigerators being recycled is becoming more efficient, and thus energy savings attributed to each unit has continued to decline. 4. Evaluation studies have shown that the actual energy savings attributable to strip curtains and door gasket for walk-in refrigeration units are between 20% and 30% of the expected savings. Thus, the per unit savings assumptions for these measures have been reduced. In addition to the existing set of EE measures, many new technologies have been added to the 2012 EE potential mode. In particular, LED lamps, LED recessed fixtures and LED case lighting for grocery stores have been incorporated in the updated model. Other emerging technologies that are included in the 2012 EE potential model include ozone laundry system, key card control for hotel rooms and demand-controlled kitchen vent hoods. 2 There are currently over 70 utilities engaged with OPOWER to provide Home Energy Reports to more than 10 million households in United States. Within California, OPOWER s client list includes Palo Alto, Pacific Gas & Electric, Southern California Gas, San Diego Gas & Electric, Sacramento Municipal Utilities District, Pasadena Water & Power, Burbank Water and Power and Anaheim Public Utilities. 3 Residential Lighting: Shedding Light on the Remaining Savings Potential in California, IEPEC 2011: Kathleen Gaffney, Tyler Mahone and Alissa Johnson (KEMA Inc.) Page 8 of 10

9 Analyses to be included in the 2013 Energy Efficiency Target Update Energy efficiency is considered to be a low-cost, carbon-free alternative to other supply options. The 2007 Climate Protection Plan assumed cumulative electric EE savings of 4.3% through 2020, with a corresponding carbon dioxide (CO 2 ) emission reduction of 15,800 metric tons in The 2010 EE goals increased the projected electric EE savings to achieve annual CO 2 emission reduction of 32,000 metric tons in As part of the 2013 EE potential assessment, staff will examine the sensitivity of electric EE potential to renewable energy prices as well as the rate impact of different levels of electric EE targets. This analysis is concurrent with the process of developing a carbon neutral electric supply portfolio for the City. The assessment will factor in potential changes in customers conservation attitude when all of their electric supplies come from renewable resources. The uncertainty in customer behavior will be represented by a high, medium and low scenario for market potential. For the gas utility, renewable supply options are currently very limited. Staff will examine costeffective fuel-switching opportunities, specifically for gas water heating to electric water heating, and the rate impact resulting from the gas load reduction. Other analyses that staff plans to undertake include the sensitivity of gas EE potential to gas prices and a comparison of carbon mitigation cost based on efficiency measures and green gas purchase. Timeline for the 2013 Energy Efficiency Target Update A timeline for the study and the required subsequent approvals and tasks are outlined in Table 2. Table 2: Work Plan to Update the City s Ten-Year Electric Energy Efficiency Plan Task Task Description Date 1 Present framework of EE target update to UAC and seek UAC input. Jul Report to UAC on EE potentials and staff recommendation of electric and gas efficiency goals. Sep Present UAC recommended EE goals to Finance Committee. Oct Obtain Council approval of 2014 to 2023 EE goals. Nov Submit updated EE goals to NCPA for filing with CEC to meet AB 2021 requirement. Mar Prepare recommendations for new EE program budgets for FY 2014 and projects for 9 years beyond. Jan Release Request for Proposals to obtain third party administrators to deliver programs to meet the goals for the upcoming period. Apr Begin delivering new programs to achieve EE program goals for FY 2014 and beyond. Jul 2013 Page 9 of 10

10 PREPARED BY: REVIEWED BY: CHRISTINE TAM, Resource Planner a i~'v- JOYCE KINNEAR, Manager, Utility Marketing Services!/ v t, ~ " JANE RATCHYE, Assistant Director, Resource Management TOM AUZENNE, Assistant Director, Customer Support Services DEPARTMENT HEAD: VAL~!~ Director of Utilities -'''".. ~ ';i!,... Page 10 of 10