Cost-Effectiveness Analysis of BGE’s DSM Programs Marshall Keneipp, PE Summit Blue Consulting, LLC Prepared for: Energy Efficiency and Conservation Stakeholders Meeting January 4, 2008

2 DSM Program Benefit/Cost Analysis Overview l Goal: To assist stakeholders in understanding how benefit/cost (B/C) tests are applied, how the analysis of BGE’s programs was conducted, and what data was used in the analysis l Discussion items: â Background on DSM Program cost-effectiveness analysis â Useful definitions â Summary of Stakeholder tests â TRC and Societal Cost Tests â How the inputs were developed â An example program B/C analysis

3 Background on DSM Program Benefit/Cost Analysis l Industry standards for conducting DSM program benefit/cost analysis first established in â The California Standard Practice Manual defines the methodology for conducting program benefit/cost tests. â First published in 1983, revised in 1988, and again in â Originally developed to provide a consistent method for comparing utility sponsored DSM programs to other utility resource options. l DSM program benefit/cost analysis employs 5 “stakeholder” tests. l The methodology established by the California Standard Practice Manual is used universally for assessing the cost effectiveness of DSM programs.

4 Program Cost Effectiveness Analysis Process l DSM program cost effectiveness analysis is a process that begins with the program concept and measure definition and concludes with selection of the most cost-effective options l Program benefit/cost analysis is one step in a process that involves a systematic analysis of measure savings and cost, market adoption and program cost Program Concepts Measure Selection Measure Specification Measure Savings / Cost Estimates Program Benefit / Cost Analysis Market Adoption Estimates

5 Five Stakeholder Tests l Participant Test - Evaluates whether a DSM program/measure is cost effective to program participants. l Ratepayer Impact Measure (RIM) Test - Measures a DSM program’s impacts on utility rates. l Program Administrator Cost (PAC) Test - Evaluates whether a DSM measure/program is cost effective to the utility. l Total Resource Cost (TRC) Test - Evaluates whether a DSM measure/program is cost effective as a resource option from the perspective of the utility’s ratepayers as a whole. l Societal Cost (SC) Test - Similar to TRC test but includes the value of other societal benefits such as environmental externalities.

6 How Tests Are Used Today l The tests are used to analyze the cost-effectiveness of DSM programs at the program level from different stakeholder perspectives. l Used by utilities to screen program options and select those which are most cost-effective. l Used in some cases to screen individual program measures although predicting certain benefits and costs at the measure level is a challenge. l Used to retrospectively assess the cost effectiveness of programs after they have been in the field for several years.

7 How Tests Are Used Today (cont.) l The tests employ a net present value analysis of benefits and costs over the life the energy efficiency measures promoted by DSM programs. l Inputs to the tests include: â utility benefits (avoided costs) based on demand and energy savings â customer incremental and installed measure costs â utility lost revenues and customer energy cost savings â program administrative costs and customer incentives

8 How Tests Are Used Today (cont.) l The TRC is currently the test which is most commonly used as the benchmark to determine which DSM programs should be implemented although some jurisdictions are looking more closely at the Societal Cost Test. l There are different perspectives on the level at which the tests are being applied. â The California PUC is mainly concerned about cost- effectiveness at the utility program portfolio level. â The Arizona PUC has examined cost effectiveness at the individual measure level for program approval purposes.

9 Some Useful Definitions l Avoided Costs – the generation, transmission, distribution, and fuel costs that that the utility avoids though investing in Demand Side Management (DSM) resources. l Lost revenues – the revenues the utility doesn’t collect from customers due to installed DSM measures. l Externalities – externality costs of power generation including environmental impacts, benefit of increased system reliability, non- energy benefits (e.g., water conservation) and other societal benefits. l Gross savings — Demand and energy savings of DSM measures at the customer level not accounting for “net-to-gross” effects.

10 Some Useful Definitions (cont.) l Free riders — Program participants who would have installed DSM measures anyway in the absence of the program. l Spillover (also called free drivers) — Measures installed by customers independently of a DSM program that occur due to the general influence or awareness building effects of the program. l Net savings — The net savings directly attributable to a DSM program equal to the gross savings adjusted by the net-to- gross ratio. l Net-to-gross ratio — An adjustment factor used to compute net savings from gross savings accounting for free-ridership, spillover and market transformation effects.

11 Total Resource Cost (TRC) Test l Evaluates whether a DSM measure/program is cost effective as a resource option from the perspective of the utility’s ratepayers as a whole. l Compares the present value of the avoided cost benefits over the DSM measure’s lifetime to the total cost of the program including both utility and participant costs. l This test is usually positive for conservation programs, with B/C ratios of 1-3, and very positive for Load Management (LM) programs, with B/C ratios >3.

12 Societal Cost Test l Similar to TRC test. Main difference is the use of a societal discount rate and adding the value of other societal benefits such as avoided environmental externalities (avoided pollution costs). l May also involve quantifying other DSM benefits such as non-energy benefits (increased productivity), reliability benefits, fuel diversity. l Depending on how externality values are quantified, the SC test results are typically equal to or more positive than the TRC test results.

13 TRC/SC Formulation l In simplified form, the Total Resource Cost Test and the Societal Test can be defined as: BCR TRC =  (UAC t +TC t )/(1+d) t-1   (PRC t + PCN t + UIC t )/(1+d) t-1 BCR SC =  (UAC t + NEB t )/(1+d) t-1   (PRC t + PCN t + UIC t )/(1+d) t-1 Where: UAC = Utility Avoided Cost TC = Tax Credits (transfer payment NIC SC) NEB = Non-Energy Benefits (societal benefit) PRC = Program Administrator Program Costs PCN = Net Participant Costs UIC = Utility Increased Supply Costs d = discount rate

14 TRC/SC Formulation (cont.) l Utility Avoided Costs UAC =  (  EN t x MCE t ) +  (  DN t x MCD t ) Where:  EN = Net energy reduction MCE = Marginal cost of energy  DN = Net demand reduction MCD = Marginal cost of demand

15 Inputs to the TRC Test  (Utility Program Admin + Customer Cost) Benefits TRC  Utility Avoided Costs NTG Ratios Net Demand and Energy Savings Marginal Cost Data Discount Rate Measure Effective Useful Lives Utility Program Administration Costs (not incl. incentives) Net Customer Installed or Incremental Measure Cost Discount Rate NTG Ratios Baseline and EE Measure Performance Characteristics Costs TRC =

16 How the Inputs to the B/C Tests Were Developed l Utility benefits â Based on the total estimated demand and energy savings for each measure, measure lifetimes, and market penetration rates. Savings estimated over the life of the measure. â Valued at BGE’s avoided costs (summarized in the Engineering Data Report and Summary of Assumptions) l Measure demand and energy savings â Calculations based on baseline and energy efficient performance characteristics for each technology for each measure, operating hours, coincidence of demand savings with utility system peak, and other variables. â Assumptions and measure savings values derived from Summit Blue’s energy efficiency measure database and simulation analyses for BGE region. â Detailed assumptions for each measure provided in the Engineering Data Report

17 How the Inputs to the B/C Tests Were Developed (cont.) l Measure effective useful lives â B/C analysis requires computation of the net present value of the benefits of the savings from the measure installation attributable to the programs over the life of the measure. â Measure life taken from established sources such as California Public Utilities Commission (CPUC), Database for Energy Efficient Resources (DEER) and New York State Energy Research and Development Authority (NYSERDA) (see Engineering Data Report for measure life / effective useful life - EULs). l Customer incremental and installed measure costs â Estimated on a measure by measure basis from data contained in Summit Blue’s energy efficiency measure database. â Cost data for each measure provided in the Engineering Data Report.

18 How the Inputs to the B/C Tests Were Developed (cont.) l Net-to-gross ratio â Certain of the benefit/cost tests require the use of savings and costs that are directly attributable to the program â Accounts for effects such as free-ridership and spillover. â Typically represented by a net-to-gross ratio that is used to compute net program savings from gross savings values. â Since BG&E had not been active in energy conservation for the last 10 years, it was considered that free ridership effects may be offset by spillover and market transformation effects. Thus a net-to-gross ratio of one was assumed for program benefit/cost analysis purposes. l Program administrative costs and customer incentives â Estimated by Honeywell based on experience with other similar programs.

19 How the Inputs to the B/C Tests Were Developed (cont.) l Market penetration rates â For most measures, utilized an average penetration rates of 1% annually â Some measures (e.g. Compact Fluorescent Lamps and T8 fixtures) are known to have potential for higher penetration rates and were assigned significantly higher penetration rates than the 1% annual rates. For example, the CFL penetration rate was estimated to reach 65% over the 8 year period. â In addition, maximum potential penetration rates for each measure were determined and used to establish a cap for all the programs â See Measure Impact and Cost Effectiveness Assessment Report for estimates of measure adoption l Utility lost revenues and customer energy cost savings â Based on the estimated demand and energy savings and BGE’s billing rates.

20 Example – Energy Star Products Program l Program cost effectiveness from the TRC perspective: â Utility benefits (avoided costs): $259M â Utility program administration costs: $24M â Customer incremental/installed costs: $51M â TRC benefit/cost ratio: 3.45 â Conclusion: This program is a cost-effective resource from the perspective of all of BGE’s ratepayers. l Cost effectiveness from the customer perspective: â Customer energy cost savings: $238M â Incentives paid to customers: $16M â Customer incremental/installed costs: $51 â Participant benefit/cost ratio: 5.00 â Conclusion: This program is cost-effective from the perspective of BGE’s customers.

21 CFL Measure Specifications and Savings and Customer Cost

22 Energy Star Products Market Potential Estimate

23 Energy Star Products Program Stream of Savings and Costs

24 Energy Star Products Program Benefit/Cost Analysis