5 Electricity: Segments in Vertical Chain High voltage: 120kV+ Long distance Low energy loss due to low resistance Nuclear (>1000MW) Hydroelectric (100 MW – 10,000 MW) Fossil-fuel (>1000 MW) Gas Turbine (<200 MW) Medium voltage: 2kV – 35 kV Medium to short distance Residential Commercial Industrial Municipal services Regulated Electric Utility (franchise monopoly) Retail Distribution Generation Transmission
6 Why Electricity is Different 1.Electricity has the following unique challenges: 1.High demand volatility 2.Negligible storage capacity requiring “just-in-time” delivery 3.No viable substitutes resulting in price inelastic demand curve 2.Deregulated power industry susceptible to significant market clearing price fluctuations due to supply or demand shocks without sufficient reserve capacity 1 Source: David Besanko, powerpoint presentation “The California Power Crisis: Day One” MECN430, Winter 2006
7 Electricity Demand Volatility Total California Load Profile for Hot Day, 1999 1 1 Source: Lawrence Berkeley National Laboratory, taken from http://www.mpoweruk.com/electricity_demand.htm, 4.26.2014 Electricity demand trends: Spikes during working hours due to commercial consumption Peaks during hottest time of the day Residential consumption is dominant in evenings Industrial and agricultural consumption are flat
Defining Demand Management ProgramLoad ImpactGraph Energy Efficiency and Conservation Shift down Demand ResponseShave down Distributed generationShift down or shave down (depends on intermittency of resource) Energy StorageSmooth Pricing Programs (Time- of-use, etc) Smooth and/or shift down
Energy Efficiency Program Types Customer gets $ to install equipment that is more efficient than they would have otherwise purchased. Ex: CFL rebate Time of Sale Developers get $ and support to install more efficient equipment and construction practices Ex: Building shell and mechanical New Construction Customers get financial incentive and support to upgrade existing equipment Ex: Air sealing and insulation Retrofit Customer gets $ to replace equipment early Ex: Refrigerators Early Replacement Customers get free equipment and products installed at no cost Ex: Apartment upgrades Direct Install
4 Decades of Energy Efficiency in CA The Rosenfeld Curve
Energy Savings and State TRMs Low-flow showerhead, 25 therms Furnace, 100 therms Pasta cooker, 1300 therms LED streetlight, 300 kWh
Utility Energy Efficiency Market Drivers & Barriers 14 PUC regulations Resource planning Customer satisfaction Corporate strategy Company KPIs Funding stability Political factors Codes & standards Why would a utility willingly (or even unwillingly) want to sell less of their product? The answer: &
The process of an IOU petitioning their regulators to charge their customers is called a rate case. The Regulatory Compact An investor owned utility (IOU) should provide returns to investors. It is also generally a natural monopoly. Because of this monopoly, the IOU is regulated by a state utility commission that authorizes rate increases and sets a fair return on investment to ensure ratepayers receive a fair price. 15
Policy Framework #2 –Required EE Goals EE Programs can be funded through a rate case or through line items on the customer’s bill called a benefits charge, a tariff, or a surcharge
Policy Framework #3 – Decoupling Decoupling gives IOUs revenues based factors such as capital expenditures and number of customers, not electric/gas sales.
Policy Framework #4 – EE Performance Incentives Approaches include: Earn % of program costs for achieving goal Earn share of achieved savings Earn % of NPV of avoided costs Rate of return for achieving savings
IOU Procurement Who administers an EE program is always a big deal –IOUs generally need to maintain close relationship with customers. JD Powers scores matter. Who implements an EE program is usually less of an issue –California has a requirement that 20%+ of portfolio budgets are bid to non-IOU companies –Illinois and other Midwest states tend to bid out much larger portions of their portfolio – e.g., Nicor programs are 99% implementer run IOUs issue RFP, Implementers submit bids, bids are scored and info requested, and implementers are called for in-person oral presentations. 22
Competitive Landscape Utility companies (ComEd, Nicor Gas, etc) CLEAResult Nexant ICF Conservation Services Group (CSG) MEEA and other NGOs Others Business opportunities from creating better technologies, better marketing or customer experience, new (riskier) contract models
Business Model 2: Rate design and On-bill Financing
Unregulated Lemonade Revenue$500 Costs$300 Taxes$0 Profits$200 $0.50/ cup of lemonade and 1,000 cups sold this year.
Regulated Lemonade How does the management of this lemonade stand arrive at a rate of $0.12 per cup? Expenses$100 Allowed Returns$15 to spend anywhere Taxes$0 Revenue Requirement $115 Sales this year1000 cups sold $/cup of lemonade$0.12/cup Revenue requirement calculation Rate case price calculation
How Rate Regulation Works: A Real Example How does the management of a utility company arrive at the electric rate you pay each month? Expenses$100M Allowed Returns$10M to investors Taxes$5M Revenue Requirement $115M Sales this year1B kWh sold $/kWh price$0.115/kWh Revenue requirement calculation Rate case price calculation
Alternative Rate Structures – Consumption & Demand NameDescription Seasonally Differentiated Rates constant for months of similar costs Time-of-UseRates vary by time of day. Usually commercial customers. Block ChargesRates increase/decrease in stairstep fashion. Critical Peak PricingRates are set until a high temperature (or other) event meets set criteria for higher Peak Price rate. Real-time PricingRates change from hour-to-hour according to market prices. Standby rates for Distributed Gen (incl Net Metering) Rates designed specifically for customers with rooftop solar or other distributed generation capacity. Covers cost of the utility distribution system, utility generation, and compensates customer for own generation. 30 Customer Charge$15.06 First 500 kWh$0.08 Additional kWh$0.15 Customer Charge$15.06 Off-Peak$0.08 On-Peak$0.15 TOU Block Charge
Competitive Landscape Utility companies (ComEd, Nicor Gas, etc) Retail providers in deregulated markets (Constellation, Integrys, etc) Business opportunities from understanding rates and on-bill financing options and creating programs and products to support
Business Model 3: ESCOs and Off-bill Financing A Perspective from the Chinese Market
Energy Performance Contracting There are three common models used by ESCOs in China: –shared savings (50%) –guaranteed savings (35%) –the energy management outsourcing model or chauffer model. (15%) Industry Building Transportation Energy Performance Contract Projects in Different Sectors
Energy Performance Contracting -History 1992-1994. Global Environmental Funding and World Bank did a study for “Carbon Dioxide Emission Control Issue in China”. They also discussed the potential of Energy Performance Contract in Chinese market. Dec. 1998. Phase one began. Three pilot ESCOs are founded. To the end of Phase one in Jun.2006, they completed 475 projects for 405 customers. Saving 1,510,000 ton standard coal per year, 5,320,000 ton CO2 per year. 2003. Phase two began. (1) EMCA was founded, which is an energy efficiency commission that works on supporting customers and ESCOs. (2) Using $22,000,000 funding provided by WB, China government increases ESCOs’ credit level and give them financing support. Jun. 2010. Phase two completed. Which means that Energy Efficiency Program has completed its trial period in China.
Big Picture Issues Who administers an EE program How Utilities make money (ratemaking) and how they make money on EE (decoupling, incentive mechanisms) New contract structures for EE Who owns EE program data (Smart meters) Who owns EE savings (Industrial opt-out, carbon markets) Simplifications on how EE is verified (Smart meters) Paradigm shifts in how EE is funded (Carbon markets) Paradigm shifts in how EE is justified (EE as a supply-side resource) How codes impact savings (federal/state) 41