The Value of Energy Efficiency

I've begun acting as a consultant to the Colorado Energy Efficiency Business
Coalition (CEEBC) in a rulemaking docket for Demand Side Management (DSM) case
before the Colorado Public Utilities Commission (PUC).  In the 2007
Legislative session, the Colorado legislature passed enabling legislation
calling for utility-wide Demand Side Management programs for natural gas utilities. 
To date, all DSM in Colorado has been focused on low income customers. 

Crucially, the legislation allows for non-energy benefits, such as increased
comfort, economic multiplier effects (i.e. jobs), and reduced volatility of energy costs be
included in the evaluation of the benefits of programs.  Since financial
benefits are a relatively small part of net benefit, this allows the
implementation of a large
number of DSM programs with large net benefit, but which might have only small
financial benefits.  The Commission will effectively decide whether those programs will be implemented
in this rulemaking.  The utilities in question, led by Xcel Energy (NYSE:
XEL), are currently only willing to include minor, easily quantified non-energy
benefits, such as water savings in an energy-efficient dishwasher.

A Seemingly Easy Decision

Suppose you have the following choice for your home or business:

A. Spend $1000 to get improved indoor air quality, fewer drafts and
hot or cold spots, quieter operation of equipment, less condensation on
windows and walls (and associated mold growth), less noise from outside the
building, a reduction in greenhouse gas emissions, an increase in the local
economy, less air pollution, increased national energy security, and $15 per
month for ten years.

B. Spend $750 and save $15 a month on your utility bill for ten
years.  You might or might not get some of the benefits in A, but
they will be smaller than the benefits you would have gotten with A
(except for the cash.)

C. Keep the money.

D. Spend $350 and save $7.50 a month on your utility bill for ten
years.  Like B, you may get some small, unknown fraction of the
other benefits in A.

Utilities Chose C.

Until a few years ago, electricity regulators and legislators were choosing C
on behalf of their customers, by meeting increasing demand for energy with new
power generation.  They are now starting to realize that the cash-only
internal rate or returns for options A and B are quite
attractive.  (These returns are 11% and 19%, respectively, similar to
buying a CD with that interest rate.)  Because the non-financial benefits
of A are difficult to quantify, most regulators only consider the cash,
and pick option B.

Option B is a traditional DSM program, which bases the decisions on
which actions to take solely on the financial impact.  It is also
essentially what Xcel Energy (NYSE: XEL)
is arguing for in the utilities commission docket, despite their widely announced
proposed doubling of their DSM target.  What Xcel does not mention is that
the current DSM program (choice D, in the above analogy), was the result
of a
settlement agreement made with environmental groups who had opposed a massive
coal-fired power plant in a previous PUC docket.  In my opinion, the
environmental groups got very little for their concession of not opposing the
750 MW Comanche 3 power plant (now under construction), but at the time, they
faced a Public Utilities Commission hostile to environmental concerns, and they
may have been lucky to get as much as they did.  I seriously doubt any
would have agreed to the settlement in today's political climate.

"A" Excellent Choice

Fortunately, legislators and regulators are awakening to the advantages of A.  
The New York State Energy Research and
Development Authority (NYSERDA) has been conducting a continuing evaluation
of their ongoing Energy $mart DSM program, which means that they chose A,
and then went on to quantify the non-cash benefits.  Because of the controversy
about valuing emissions, the environmental benefits were not included in this
study, but they used a series of questions similar to the poll above, and some
advanced statistical analysis, to figure out what people would actually be
willing to pay for the other benefits.

What they found was that the net present value of all benefits from the
Energy $mart program were worth approximately twice as much as they would seem
to be worth when measured on a traditional, cash-only basis (called
"Scenario 1 TMET" in the study.)  And this does not include the
environmental benefits listed in A, nor energy security.  In other
words, people would be willing to pay well over twice as much for the benefits
in option A, as they would be willing to pay for the cash alone.

Conclusion

Studying non-energy benefits is still an inexact science, and one of the
things CEEBC is pushing for in the PUC docket is to make sure that we do our own
study of non-energy benefits in Colorado, so we can better understand what we
are getting (besides an excellent financial return) for our money.  That
understanding should lead to more DSM programs, because the results will be
better and higher valued as people begin to recognize the true worth of energy
efficiency.  This has already benefited the companies, such as Energy
Service Contractors, and providers of energy efficient products and the
controls which enable them as more and more individuals, businesses, and
utilities (gently prodded by the regulators), begin to choose A.

DISCLOSURE: Tom Konrad  and/or his clients have positions
in these companies mentioned here: XEL.  (They're actually not bad, as utilities
go, although they have been much more active on the renewable energy and energy
efficiency front in Minnesota than they have been in Colorado.  This is, in
my opinion, mainly the result to the proactive stance of regulators.)

December 6, 2007